Stochastic volatility options pricing with wavelets and artificial neural networks

Christopher Zapart

Quantitative Finance, 2002, vol. 2, issue 6, 487-495

Abstract: The paper describes an alternative options pricing method which uses a binomial tree linked to an innovative stochastic volatility model. The volatility model is based on wavelets and artificial neural networks. Wavelets provide a convenient signal/noise decomposition of the volatility in the nonlinear feature space. Neural networks are used to infer future volatility from the wavelets feature space in an iterative manner. The bootstrap method provides the 95% confidence intervals for the options prices. Market options prices as quoted on the Chicago Board Options Exchange are used for performance comparison between the Black-Scholes model and a new options pricing scheme. The proposed dynamic volatility model produces as good as and often better options prices than the conventional Black-Scholes formulae.

Date: 2002
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DOI: 10.1080/14697688.2002.0000016

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