Comparing Two Different Option Pricing Methods

Alessandro Bondi, Dragana Radojičić and Thorsten Rheinländer
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Alessandro Bondi: Classe di Scienze, Scuola Normale Superiore di Pisa, 56126 Pisa, Italy
Dragana Radojičić: TU Wien, Institute of Statistics and Mathematical Methods in Economics, 22180 Vienna, Austria
Thorsten Rheinländer: TU Wien, Institute of Statistics and Mathematical Methods in Economics, 22180 Vienna, Austria

Risks, 2020, vol. 8, issue 4, 1-28

Abstract: Motivated by new financial markets where there is no canonical choice of a risk-neutral measure, we compared two different methods for pricing options: calibration with an entropic penalty term and valuation by the Esscher measure. The main aim of this paper is to contrast the outcomes of those two methods with real-traded call option prices in a liquid market like NASDAQ stock exchange, using data referring to the period 2019–2020. Although the Esscher measure method slightly underperforms the calibration method in terms of absolute values of the percentage difference between real and model prices, it could be the only feasible choice if there are not many liquidly traded derivatives in the market.

Keywords: geometric Esscher measure; calibration with entropic penalty term; financial markets; option pricing (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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