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Wei, Bizhu (2008) The Valuation of Option Pricing Models. [Dissertation (University of Nottingham only)] (Unpublished)

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Abstract

ABSTRACT

This dissertation analyses, compares and explores the implied volatility of the traditional Black-Scholes Option Pricing Model, and evaluates the empirical performance of the Black-Scholes Model, Modified Black-Scholes Model and GARCH Option Pricing Model. In doing so, the minimised mean squared error methods are applied. Most existing empirical studies were based on the analysis of the options traded in American markets, for example, on S&P 100 Index and S&P 500 Index. Regardless of the importance of the London markets, there is less research on pricing issues in the FTSE 100 index options contracts. By filling the gap in the literature, this dissertation is according to the study on the FTSE 100 Index call and put options. The empirical studies have proven the existence of the volatility smile, which is derived from the fact that volatility of the FTSE 100 Index options vary across moneyness and maturity. The implied volatilities for both call and put options appear to exhibit a U-shape although some abnormal curves also occur under the incomplete markets condition. Generally, the empirical results from the comparison present that the GARCH model is outperformed than Black-Scholes model and Modified Black-Scholes Model in most cases, and the reduction of pricing errors by implementing the Modified Black-Scholes Model is noticeable. However, its performance on call and put options with less than 60 days and 60-120 days to maturity are relatively poor. In addition, GARCH is better in pricing long term to maturity.

Item Type:	Dissertation (University of Nottingham only)
Depositing User:	EP, Services
Date Deposited:	02 Feb 2009
Last Modified:	16 Jan 2018 17:36
URI:	https://eprints.nottingham.ac.uk/id/eprint/22106

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