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On the Importance of the Traders’ Rules for Pricing Options: Evidence From Intraday Data
Author(s) -
Kim Sol,
Lee Changjun
Publication year - 2014
Publication title -
asia‐pacific journal of financial studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.375
H-Index - 15
eISSN - 2041-6156
pISSN - 2041-9945
DOI - 10.1111/ajfs.12075
Subject(s) - futures contract , stochastic volatility , valuation of options , volatility (finance) , economics , econometrics , implied volatility , black–scholes model , index (typography) , volatility smile , financial economics , computer science , world wide web
Using intraday data from the KOSPI 200 Index options, we examine the pricing performance of alternative option pricing models. For comparison, we consider the Black and Scholes ( Journal of Political Economy , 81, 1973, 637) model, a simple traders’ rule known as the ad hoc Black‐Scholes model, the deterministic volatility model, the stochastic volatility model, and the stochastic volatility with jumps model. Contrary to the findings of Jackwerth and Rubinstein ( Recovering stochastic processes from option prices ), Li and Pearson ( A “horse race” among competing option pricing models using S&P 500 Index options ), and Kim ( Journal of Futures Markets , 29 , 2009, 999) using daily data, we find that the most complicated model, namely the stochastic volatility with jumps model, shows the best performance for pricing the KOSPI 200 Index options. Overall, our evidence from intraday data indicates that the traders’ rules do not dominate mathematically more sophisticated models.