Which Option Pricing Model is the Best? High Frequency Data for Nikkei225 Index Options

Ryszard Kokoszczyński, Pawel Sakowski and Robert Ślepaczuk

No 2010-16, Working Papers from Faculty of Economic Sciences, University of Warsaw

Abstract: Option pricing models are the main subject of many research papers prepared both in academia and financial industry. Using high-frequency data for Nikkei225 index options, we check the properties of option pricing models with different assumptions concerning the volatility process (historical, realized, implied, stochastic or based on GARCH model). In order to relax the continuous dividend payout assumption, we use the Black model for pricing options on futures, instead of the Black-Scholes-Merton model. The results are presented separately for 5 classes of moneyness ratio and 5 classes of time to maturity in order to show some patterns in option pricing and to check the robustness of our results. The Black model with implied volatility (BIV) comes out as the best one. Highest average pricing errors we obtain for the Black model with realized volatility (BRV). As a result, we do not see any additional gain from using more complex and time-consuming models (SV and GARCH models. Additionally, we describe liquidity of the Nikkei225 option pricing market and try to compare our results with a detailed study for the emerging market of WIG20 index options (Kokoszczyński et al. 2010b).

Keywords: option pricing models; financial market volatility; high-frequency financial data; midquotes data; transactional data; realized volatility; implied volatility; stochastic volatility; microstructure bias; emerging markets (search for similar items in EconPapers)
JEL-codes: C22 C61 G14 G15 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2010
New Economics Papers: this item is included in nep-mst and nep-rmg
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http://www.wne.uw.edu.pl/inf/wyd/WP/WNE_WP39.pdf First version, 2010 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:war:wpaper:2010-16

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