Peng, S. (2006) Testing and finding the generating functions of an option pricing mechanism through market data. [Study Group Report]
|
PDF
9MB |
Abstract
We study dynamic pricing mechanisms of financial derivatives. A typical model of such pricing mechanism is the so-called g-expectation defined by solutions of a backward stochastic differential equation with g as its generating function. Black-Scholes pricing model is a special linear case of this pricing mechanism. We are mainly concerned with two types of pricing mechanisms in an option market: the market pricing mechanism through which the market prices of options are produced, and the ask-bid pricing mechanism operated through the system of market makers. The later one is a typical nonlinear pricing mechanism. Data of prices produced by these two pricing mechanisms are usually quoted in an option market.
We introduce a criteria to test if a dynamic pricing mechanism under investigation is a g-pricing mechanism. This domination condition was statistically tested using CME data documents. The result of test is significantly positive. We also provide some useful characterizations of a pricing mechanism by its generating function.
Item Type: | Study Group Report |
---|---|
Problem Sectors: | Finance |
Study Groups: | Chinese Study Groups with Industry > Workshop on Industrial Applications 2006 (Hong Kong, Dec 4-8, 2006) |
ID Code: | 525 |
Deposited By: | Dr Kamel Bentahar |
Deposited On: | 30 Jan 2012 16:32 |
Last Modified: | 29 May 2015 20:08 |
Repository Staff Only: item control page