Valuation of European Call Options Using Wavelet-Based Pricing Model and Black-Scholes Pricing Model
International Journal of Data Science and Analysis
Volume 5, Issue 5, October 2019, Pages: 92-98
Received: Oct. 2, 2019; Accepted: Oct. 12, 2019; Published: Oct. 28, 2019
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Authors
Sigei Sheila Chepkorir, Department of Statistics and Actuarial Sciences, Jomo Kenyatta University of Agriculture and Technology, Nairobi, Kenya
Anthony Gichuhi Waititu, Department of Statistics and Actuarial Sciences, Jomo Kenyatta University of Agriculture and Technology, Nairobi, Kenya
Jane Aduda Akinyi, Department of Statistics and Actuarial Sciences, Jomo Kenyatta University of Agriculture and Technology, Nairobi, Kenya
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Abstract
The Black- Scholes model is a well-known model for hedging and pricing derivative securities. However, it exhibits some systematic biases or unrealistic assumptions like the log-normality of asset returns and constant volatility. A number of studies have attempted to reduce these biases in different ways. The objective of this study is to value a European call option using a non-parametric model and a parametric model. Amongst the non-parametric approaches used to improve the accuracy of the model in this study is the Wavelet-based pricing model. This model is found as promising alternative as far as pricing of European options is concerned, due to its varied volatility of the underlying security and estimation of the risk neutral MGF. This study made an attempt to improve the accuracy of option price estimation using Wavelet method and it improves the accuracy due to its ability to estimate the risk neutral MGF. The MSE and RMSE of Wavelet model is 0.208546 and 0.456669 respectively which is much lower than that of Black-Scholes model and therefore in conclusion, Wavelet model outperforms the other model. The study was carried out using simulated stock prices of 1024 observations.
Keywords
Options, Wavelet Model, Derivatives, MGF
To cite this article
Sigei Sheila Chepkorir, Anthony Gichuhi Waititu, Jane Aduda Akinyi, Valuation of European Call Options Using Wavelet-Based Pricing Model and Black-Scholes Pricing Model, International Journal of Data Science and Analysis. Vol. 5, No. 5, 2019, pp. 92-98. doi: 10.11648/j.ijdsa.20190505.13
Copyright
Copyright © 2019 Authors retain the copyright of this article.
This article is an open access article distributed under the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/) which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
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