The MIIS Eprints Archive

Testing and finding the generating functions of an option pricing mechanism through market data

Peng, S. (2006) Testing and finding the generating functions of an option pricing mechanism through market data. [Study Group Report]

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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:30 Jan 2012 16:32

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