Lin, Xiaozheng, Wang, Meiqing and Lai, Choi-Hong ORCID: https://orcid.org/0000-0002-7558-6398 (2021) A modification term for Black-Scholes model based on discrepancy calibrated with real market data. Data science in finance and economics. Data Science in Finance and Economics, 1 (4). pp. 313-326. ISSN 2769-2140 (Online) (doi:10.3934/DSFE.2021017)

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Abstract

The Black-Scholes option pricing model (B-S model) generally requires the assumption that the volatility of the underlying asset be a piecewise constant. However, empirical analysis shows that there are discrepancies between the option prices obtained from the B-S model and the market prices. Most current modifications to the B-S model rely on modelling the implied volatility or interest rate. In contrast to the existing modifications to the Black-Scholes model, this paper proposes the concept of including a modification term to the B-S model itself. Using the actual discrepancies of the results of the Black-Scholes model and the market prices, the modification term related to the implied volatility is derived. Experimental results show that the modified model produces a better option pricing results when compare to market data.

Item Type:	Article
Additional Information:	This submission is for GREAT2022.
Uncontrolled Keywords:	option pricing; Black-Scholes model; modification term; disturbance term; higher-order algorithm; second-order derivatives
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management Q Science > QA Mathematics > QA75 Electronic computers. Computer science
Faculty / School / Research Centre / Research Group:	Faculty of Engineering & Science Faculty of Engineering & Science > School of Computing & Mathematical Sciences (CMS)
Related URLs:	Publisher
Last Modified:	19 Apr 2022 13:26
URI:	http://gala.gre.ac.uk/id/eprint/35861

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