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Option Pricing Models with HF Data – a Comparative Study. The Properties of Black Model with Different Volatility Measures

Ryszard Kokoszczyński, Natalia Nehrebecka (), Pawel Sakowski (), Pawel Strawinski () and Robert Ślepaczuk

No 2010-03, Working Papers from Faculty of Economic Sciences, University of Warsaw

Abstract: This paper compares option pricing models, based on Black model notion (Black, 1976), especially focusing on the volatility models implied in the process of pricing. We calculated the Black model with historical (BHV), implied (BIV) and several different types of realized (BRV) volatility (additionally searching for the optimal interval Δ, and parameter n - the memory of the process). Our main intention was to find the best model, i.e. which predicts the actual market price with minimum error. We focused on the HF data and bidask quotes (instead of transactional data) in order to omit the problem of non-synchronous trading and additionally to increase the significance of our research through numerous observations. After calculation of several error statistics (RMSE, HMAE and HRMSE) and additionally the percent of price overpredictions, the results confirmed our initial intuition that that BIV is the best model, BHV being the second best, and BRV – the least efficient of them. The division of our database into different classes of moneyness ratio and TTM enabled us to observe the distinct differences between compared pricing models. Additionally, focusing on the same pricing model with different volatility processes results in the conclusion that point-estimate, not averaged process of RV is the main reason of high errors and instability of valuation in high volatility environment. Finally, we have been able to detect “spurious outliers” and explain their effect and the reason for them owing to the multi-dimensional comparison of the pricing error statistics.

Keywords: option pricing models; financial market volatility; high-frequency financial data; realized volatility; implied volatility; microstructure bias; emerging markets (search for similar items in EconPapers)
JEL-codes: G14 G15 C61 C22 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2010
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http://www.wne.uw.edu.pl/inf/wyd/WP/WNE_WP26.pdf First version, 2010 (application/pdf)

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