Wavelet-based option pricing: An empirical study

Xiaoying Liu () and Liya Shen

Essex Finance Centre Working Papers from University of Essex, Essex Business School

Abstract: In this paper, we adopt a wavelet-based option valuation model and empirically compare the pricing and forecasting performance of this model with that of the stochastic volatility model with jumps and the spline method. Both the in-sample valuation and out-of-sample forecasting accuracy are examined using daily index options in the UK, Germany, and Hong Kong from January 2009 to December 2012. Our results show that the wavelet-based model compares favorably with the other two models and that it provides an excellent alternative for valuing option prices. Its superior performance comes from the powerful ability of the wavelet method in approximating the risk-neutral moment-generating functions.

Keywords: Pricing; Option Pricing; Wavelet Method; Stochastic Volatility; Jump Risk (search for similar items in EconPapers)
Date: 2017-01
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Persistent link: https://EconPapers.repec.org/RePEc:esy:uefcwp:18772

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