Peng, S. (2006) Testing and finding the generating functions of an option pricing mechanism through market data. [Study Group Report]
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|
|Study Groups:||Chinese Study Groups with Industry > Workshop on Industrial Applications 2006 (Hong Kong, Dec 4-8, 2006)|
|Deposited By:||Dr Kamel Bentahar|
|Deposited On:||30 Jan 2012 16:32|
|Last Modified:||30 Jan 2012 16:32|
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