Options Pricing by Monte Carlo Simulation, Binomial Tree and BMS Model: a comparative study of Nifty50 options index

Ali Bendob and Naima Bentouir ()

Journal of Banking and Financial Economics, 2019, vol. 1, issue 11, 79-95

Abstract: Investment behaviour, techniques and choices have evolved in the options markets since the launch of options trading in 1973. Today, we are entering the field of Big Data and the explosion of information, which has become the main feature of science, impacts investors' decisions and their trading position, particularly in the financial markets. Our paper aims to testing the effectiveness of the most popular options pricing models , which are the Monte Carlo simulation method, the Binomial model, and the benchmark model; the Black-Scholes model, when we ignore/take on account the Moneyness categories and different time to maturities; five months, one year, and two years, in addition to comparing these models, we will then test the effect of each model on the prediction of the current options prices, using the regression analysis, and the Nifty50 option index during the period of 25/07/2014 to 30/06/2016. The result shows that all models are overpriced in all Moneyness categories with a high level of volatility in In-the money category, other finding concludes that the Monte Carlo Simulation method is outperforming when the volatility is lower, while the Black-Sholes model and the Binomial model are outperforming in the entire sample with ignoring the Moneyness.

Keywords: options pricing; option markets; Black-Scholes model; Binomial model; Monte-Carlo Simulation model; Greek letters (search for similar items in EconPapers)
JEL-codes: C13 C15 G12 G13 G15 G17 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (2)

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