eprintid: 525
rev_number: 11
eprint_status: archive
userid: 7
dir: disk0/00/00/05/25
datestamp: 2012-01-30 16:32:17
lastmod: 2015-05-29 20:08:53
status_changed: 2012-01-30 16:32:17
type: report
metadata_visibility: show
item_issues_count: 0
creators_name: Peng, S.
title: Testing and finding the generating functions of an option pricing mechanism through market data
ispublished: pub
subjects: finance
studygroups: chinese2006
full_text_status: public
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.
date: 2006
citation:   Peng, S.  (2006) Testing and finding the generating functions of an option pricing mechanism through market data.  [Study Group Report]     
document_url: http://miis.maths.ox.ac.uk/miis/525/1/Testing-and-finding-teh-generating-functions-g-of-an-option-pricing-mechanism-through-market-data.pdf