Confidence limits for data mining models of options prices

J.V. Healy, M. Dixon, B.J. Read and F.F. Cai

Physica A: Statistical Mechanics and its Applications, 2004, vol. 344, issue 1, 162-167

Abstract: Non-parametric methods such as artificial neural nets can successfully model prices of financial options, out-performing the Black–Scholes analytic model (Eur. Phys. J. B 27 (2002) 219). However, the accuracy of such approaches is usually expressed only by a global fitting/error measure. This paper describes a robust method for determining prediction intervals for models derived by non-linear regression. We have demonstrated it by application to a standard synthetic example (29th Annual Conference of the IEEE Industrial Electronics Society, Special Session on Intelligent Systems, pp. 1926–1931). The method is used here to obtain prediction intervals for option prices using market data for LIFFE “ESX” FTSE 100 index options (http://www.liffe.com/liffedata/contracts/month_onmonth.xls). We avoid special neural net architectures and use standard regression procedures to determine local error bars. The method is appropriate for target data with non constant variance (or volatility).

Keywords: Option pricing; Neural nets; Data mining (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:344:y:2004:i:1:p:162-167

DOI: 10.1016/j.physa.2004.06.112

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