Option Pricing Model Biases: Bayesian and Markov Chain Monte Carlo Regression Analysis

Sharif Mozumder (), Taufiq Choudhry () and Michael Dempsey ()
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Sharif Mozumder: University of Dhaka
Taufiq Choudhry: University of Southampton
Michael Dempsey: Ton Duc Thang University

Computational Economics, 2021, vol. 57, issue 4, No 14, 1287-1305

Abstract: Abstract We investigate systematic and unsystematic option pricing biases in (a) pure jump Lévy, (b) jump-diffusion, (c) stochastic volatility, and (d) GARCH models applied to the Black–Scholes–Merton model. We use options data for trades on the S&P500 index from the CBOE. In addition to standard ordinary least square regression, we employ Bayesian regression and Markov Chain Monte Carlo regression to investigate the moneyness and maturity biases of the models. We demonstrate the usefulness of these advanced methodologies as compared to the benchmark techniques.

Keywords: GARCH pricing; Stochastic volatility pricing; Lévy pricing; Fast Fourier transform; Bayesian regression; MCMC regression (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s10614-020-10029-x

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