Robust European Call Option Pricing via Linear Regression

Ahmad W. Bitar
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Ahmad W. Bitar: LIST3N - Laboratoire Informatique et Société Numérique - UTT - Université de Technologie de Troyes, LIST3N - MSAD - LIST3N - Modélisation, stochastique, apprentissage et décision - LIST3N - Laboratoire Informatique et Société Numérique - UTT - Université de Technologie de Troyes, UTT - Université de Technologie de Troyes

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Abstract: The one-period trinomial option pricing model is well-known in the literature as it considers three possible movement directions of the asset price. However, by equating the price of the option to the self-financing hedging portfolio at maturity, this yields a linear system of three equations with two unknowns that correspond to the coefficients for the delta-hedging portfolio. Hence, the trinomial model is said to be incomplete, that is, there exists an infinite number of equivalent martingale measures. To deal with this incompleteness, this paper aims to price options via some robust linear regression techniques in order to mainly handle the problem of outliers that the least squares fails to consider. The proposed robust techniques are evaluated on numerical data, and the results of which demonstrate their effectiveness for European call option pricing.

Keywords: Asset prices; Trinomial model; European call option pricing; Least squares; Robust linear regression (search for similar items in EconPapers)
Date: 2025-03-17
Note: View the original document on HAL open archive server: https://utt.hal.science/hal-04754957v3
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Published in IEEE Symposium Series on Computational Intelligence, Mar 2025, Trondheim ( Norvège), Norway

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