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Keywords = calibration with entropic penalty term

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28 pages, 563 KB  
Article
Comparing Two Different Option Pricing Methods
by Alessandro Bondi, Dragana Radojičić and Thorsten Rheinländer
Risks 2020, 8(4), 108; https://doi.org/10.3390/risks8040108 - 19 Oct 2020
Cited by 2 | Viewed by 3535
Abstract
Motivated by new financial markets where there is no canonical choice of a risk-neutral measure, we compared two different methods for pricing options: calibration with an entropic penalty term and valuation by the Esscher measure. The main aim of this paper is to [...] Read more.
Motivated by new financial markets where there is no canonical choice of a risk-neutral measure, we compared two different methods for pricing options: calibration with an entropic penalty term and valuation by the Esscher measure. The main aim of this paper is to contrast the outcomes of those two methods with real-traded call option prices in a liquid market like NASDAQ stock exchange, using data referring to the period 2019–2020. Although the Esscher measure method slightly underperforms the calibration method in terms of absolute values of the percentage difference between real and model prices, it could be the only feasible choice if there are not many liquidly traded derivatives in the market. Full article
(This article belongs to the Special Issue Interplay between Financial and Actuarial Mathematics)
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