 Hedging derivative securities with genetic programmingShu‐Heng Chen, Wo‐Chiang Lee and Chia‐Hsuan Yeh Intelligent Systems in Accounting, Finance and Management, 1999, vol. 8, issue 4, 237-251 Abstract: One of the most recent applications of GP to finance is to use genetic programming to derive option pricing formulas. Earlier studies take the Black–Scholes model as the true model and use the artificial data generated by it to train and to test GP. The aim of this paper is to provide some initial evidence of the empirical relevance of GP to option pricing. By using the real data from S&P 500 index options, we train and test our GP by distinguishing the case in‐the‐money from the case out‐of‐the‐money. Unlike most empirical studies, we do not evaluate the performance of GP in terms of its pricing accuracy. Instead, the derived GP tree is compared with the Black–Scholes model in its capability to hedge. To do so, a notion of tracking error is taken as the performance measure. Based on the post‐sample performance, it is found that in approximately 20% of the 97 test paths GP has a lower tracking error than the Black–Scholes formula. We further compare our result with the ones obtained by radial basis functions and multilayer perceptrons and one‐stage GP. Copyright © 1999 John Wiley & Sons, Ltd. Date: 1999 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:wly:isacfm:v:8:y:1999:i:4:p:237-251 Ordering information: This journal article can be ordered from Access Statistics for this article More articles in Intelligent Systems in Accounting, Finance and Management from John Wiley & Sons, Ltd. |
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