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Option Pricing via Multi-path Autoregressive Monte Carlo Approach

Wei-Cheng Chen and Wei-Ho Chung

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Abstract: The pricing of financial derivatives, which requires massive calculations and close-to-real-time operations under many trading and arbitrage scenarios, were largely infeasible in the past. However, with the advancement of modern computing, the efficiency has substantially improved. In this work, we propose and design a multi-path option pricing approach via autoregression (AR) process and Monte Carlo Simulations (MCS). Our approach learns and incorporates the price characteristics into AR process, and re-generates the price paths for options. We apply our approach to price weekly options underlying Taiwan Stock Exchange Capitalization Weighted Stock Index (TAIEX) and compare the results with prior practiced models, e.g., Black-Scholes-Merton and Binomial Tree. The results show that our approach is comparable with prior practiced models.

New Economics Papers: this item is included in nep-cmp
Date: 2019-06
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Published in 61st Meeting of EURO Working Group for Commodities and Financial Modeling, 16-18 MAY 2018, Kaunas, Lithuania

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Handle: RePEc:arx:papers:1906.06483