Comparison of Black-Scholes and Garch Option Models on The Kompas100 Index With a Long Straddle Strategy During 2008-2021

Riko Hendrawan ()
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Riko Hendrawan: Telkom University, Indonesia Author-2-Name: M. Dirga Aulia Hasibuan Author-2-Workplace-Name: Telkom University, Indonesia Author-3-Name: Author-3-Workplace-Name: Author-4-Name: Author-4-Workplace-Name: Author-5-Name: Author-5-Workplace-Name: Author-6-Name: Author-6-Workplace-Name: Author-7-Name: Author-7-Workplace-Name: Author-8-Name: Author-8-Workplace-Name:

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Abstract: " Objective - This study aims to look at the use of contract options through Black Scholes and GARCH modeling on the Kompas100 Index with a long straddle strategy both in crisis and non-crisis. Methodology – The data used for the observation period are the closing price of the Kompas100 Index from 2008 to 2021. The testing lasts one month (from February 2008 to December 2021), and three months (from April 2008 to December 2021). To get the results, the average mean square errors (AMSE) of the two models were compared by implementing the long straddle strategy, meaning that the model is better if the percentage number is lower. Findings – Over a one-month period during the crisis, GARCH modeling performed better than Black Scholes modeling, with an error rate of 2.5539% for call options. Meanwhile, Black Scholes's modeling was better on put options with an error rate of 1.9725%. In the 3-month period, GARCH modeling was better, with error rates for call and put options of 10.3882% and 7.4282%, respectively. In non-crisis years, GARCH modeling beat Black Scholes modeling during a one-month period with an error rate of 0.2689%, while Black Scholes modeling was better on put options with an error rate of 0.2943%. In addition, over a 3-month period, Black Scholes modeling performs better, with error rates on call and put options of 0.8821% and 1.0337%, respectively. Novelty – The longer the agreement term, the greater the error rate in both option models. The study results revealed that the error rate for the 3-month period was higher than the 1-month period. Type of Paper - Empirical/ Review"

Keywords: Option; Black Scholes; GARCH; AMSE; Long Straddle (search for similar items in EconPapers)
JEL-codes: G11 G13 (search for similar items in EconPapers)
Pages: 15
Date: 2023-04-30
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Published in Journal of Finance and Banking Review, Volume 7, Issue 4

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Persistent link: https://EconPapers.repec.org/RePEc:gtr:gatrjs:jfbr208

DOI: 10.35609/jfbr.2023.7.4(1)

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