A Regression Model to Investigate the Performance of Black-Scholes using Macroeconomic Predictors
Journal Title: INTERNATIONAL JOURNAL OF MATHEMATICS TRENDS AND TECHNOLOGY - Year 2014, Vol 5, Issue 2
Abstract
As it is well known an option is defined as the right to buy sell a certain asset, thus, one can look at the purchase of an option as a bet on the financial instrument under consideration. Now while the evaluation of options is a completely different mathematical topic than the prediction of future stock prices, there is some relationship between the two. It is worthy to note that henceforth we will only consider options that have a given fixed expiration time T, i.e. we restrict the discussion to the so called European options. Now, for a simple illustration of the relationship between true stock prices and options let us consider the following situation: if at the begging of January the S&P index is valued at $1277 and then at the end of December of the same year the price of the index became $1400 then the fair price of the option to buy this in January would be $123, assuming T=1. This is a fair price because if the holder purchases the option for $122 or less then he or she gains while if the holder purchases the option for $124 or more then the bank wins while $123 is neutral for both parties. As one can see from this simple illustration predicting the fair price of an option is directly related to predicting the value of the stock price in a future time T.
Authors and Affiliations
Timothy A. Smith , Ersoy Subasi , Aliraza M Rattansi
Keywords
Related Articles
- EP ID EP157666
- DOI -
- Views 91
- Downloads 0
A New Approach to Robust Partial Least Squares Regression Analysis
Partial Least Squares Regression (PLSR) is a linear regression technique developed to relate many independent variables to one or several dependent variables. Robust methods are introduced to reduce or remove the effects...
Analysis of Queuing Model for Machine Repairing System with Bernoulli Vacation Schedule
In this paper, we consider a queueing model for machine repairing system with Bernoulli vacation schedule. The failure times, repair times and vacation times are all assumed to be exponentially distributed. In congestion...
On Normed Space Valued Total Paranormed Orlicz Space of Null Sequences and its Topological Structures
In this paper,we introduce and study a new class c0 (S, M, u–) of normed space S valued sequences using Orlicz function M as a generalization of basic space of null complex sequences c0. Beside the investigation pertaini...
Teachers’ Perception of the new Nine-Year Basic Education Mathematics Curriculum in Nigeria
The study investigated the perception of primary and junior secondary mathematics teachers on the new nine-year basic education mathematics curriculum in Nigeria. A descriptive survey design was adopted for the stu...
Numerical Solution of Fuzzy Differential Equations by Extended Runge-Kutta Method and the Dependency Problem
In this paper we use extended Runge-Kutta-like formulae of order four (ERK4) and of order five (ERK5) by taking into account the dependency problem that arises in fuzzy setting. This method is adopted to solve the depend...