Open AccessAccuracy Tests Of American Put Valuation Models For Pharmaceutical Equity Options
Author(s) -
Yong H. Kim,
Sangwoo Heo,
Peter Cashel-Cordo,
Yong S. Jang
Publication year - 2011
Publication title -
journal of business and economics research
Language(s) - English
Resource type - Journals
eISSN - 2157-8893
pISSN - 1542-4448
DOI - 10.19030/jber.v6i2.2389
Subject(s) - moneyness , valuation (finance) , valuation of options , economics , econometrics , equity (law) , binomial options pricing model , black–scholes model , binary option , volatility (finance) , asian option , variance (accounting) , actuarial science , financial economics , finance , accounting , political science , law
This study compares the performance of the Macmillan (1986), Barone-Adesi and Whaley (1987) MBAW model, Ju and Zhong (1999) MQuad model, Black-Scholes model and Put-Call Parity in pricing American put options of pharmaceutical companies. These are evaluated using actual option prices for three companies over 2000 to 2005, as opposed to the previous use of generated binomial option pricing data. We compare the forecasting accuracy by maturity, moneyness, and variance estimate. Contrary to Ju and Zhong (1999), we find that the MBAW outperforms the other models for at-the-money, and out-of-the-money options. The MQuad model performs best for in-the-money options. However, in this case both the MBAW and MQuad models estimates are very similar. Our results are consistent irrespective of option maturities and volatility estimates. These findings raise questions regarding the practice of using actual prices as the true value, compared to the previous results that use simulated prices.