Degree of Mispricing with the Black-Scholes Model and Nonparametric Cures

Ramazan Gencay and Aslihan Salih

Annals of Economics and Finance, 2003, vol. 4, issue 1, 73-101

Abstract: The Black-Scholes pricing errors are larger in the deeper out-of-the-money options relative to the near out-of-the-money options, and mispricing worsens with increased volatility. Our results indicate that the Black-Scholes model is not the proper pricing tool in high volatility situations especially for very deep out-of-the-money options. Feedforward networks provide more accurate pricing estimates for the deeper out-of-the money options and handles pricing during high volatility with considerably lower errors for out-of-the-money call and put options. This could be invaluable information for practitioners as option pricing is a major challenge during high volatility periods.

Keywords: Option pricing; Nonparametric methods; Feedforward networks; Bayesian regularization; Early stopping; Bagging (search for similar items in EconPapers)
JEL-codes: G0 G1 (search for similar items in EconPapers)
Date: 2003
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:cuf:journl:y:2003:v:4:i:1:p:73-101

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