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Comparing Two Different Option Pricing Methods

Author

Listed:
  • Alessandro Bondi

    (Classe di Scienze, Scuola Normale Superiore di Pisa, 56126 Pisa, Italy)

  • Dragana Radojičić

    (TU Wien, Institute of Statistics and Mathematical Methods in Economics, 22180 Vienna, Austria)

  • Thorsten Rheinländer

    (TU Wien, Institute of Statistics and Mathematical Methods in Economics, 22180 Vienna, Austria)

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 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.

Suggested Citation

  • Alessandro Bondi & Dragana Radojičić & Thorsten Rheinländer, 2020. "Comparing Two Different Option Pricing Methods," Risks, MDPI, vol. 8(4), pages 1-28, October.
    • Handle: RePEc:gam:jrisks:v:8:y:2020:i:4:p:108-:d:431429
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    References listed on IDEAS

    as
    1. Tahir Choulli & Christophe Stricker, 2006. "More On Minimal Entropy–Hellinger Martingale Measure," Mathematical Finance, Wiley Blackwell, vol. 16(1), pages 1-19, January.
    2. Van Heerwaarden, A. E. & Kaas, R. & Goovaerts, M. J., 1989. "Properties of the Esscher premium calculation principle," Insurance: Mathematics and Economics, Elsevier, vol. 8(4), pages 261-267, December.
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    Cited by:

    1. Corina Constantinescu & Julia Eisenberg, 2021. "Special Issue “Interplay between Financial and Actuarial Mathematics”," Risks, MDPI, vol. 9(8), pages 1-3, July.

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