Optimal Combination of Three Volatilities for Better Black-Scholes Option Pricing

Sadi Fadda

Abstract


The most popular parametric formula (B-S) used in pricing the European-style options is given by Black-Scholes (1973). The prediction power of (B-S) strongly rely on the accuracy of the independent variables: spot price, strike price, time to maturity, risk free interest rate and market volatility. To improve the accuracy, many volatility models are proposed. Also Day and Lewis (1992) introduced the idea of combining implied volatility and EGARCH. In this article an optimal combination of market implied volatility, GARCH(1,1), and GJR(1,1) is made, and the prediction power of B-S is doubled.

Keywords


Black-Scholes;Implied volatility;GARCH (1,1);GJR(1,1);optimal combination;option pricing;S&P100; put options;call options

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DOI: http://dx.doi.org/10.21533/scjournal.v7i1.151

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Copyright (c) 2018 Sadi Fadda

ISSN 2233 -1859

Digital Object Identifier DOI: 10.21533/scjournal

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This work is licensed under a Creative Commons Attribution 4.0 International License