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Midquotes or Transactional Data? The Comparison of Black Model on HF Data

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Author Info

  • Ryszard Kokoszczyński

    ()
    (Faculty of Economic Sciences, University of Warsaw, Economic Institute, National Bank of Poland)

  • Paweł Sakowski

    ()
    (Faculty of Economic Sciences, University of Warsaw)

  • Robert Ślepaczuk

    ()
    (Faculty of Economic Sciences, University of Warsaw)

Abstract

The main idea of this research is to check the efficiency of the Black option pricing model on the basis of HF emerging market data. However, liquidity constraints - a typical feature of an emerging derivatives market - put severe limits for conducting such a study. That is the reason why Kokoszczynski et al., 2010, have conducted their earlier research on midquotes data treating them as potential transactional data. They have got some intriguing conclusions about implementing different volatility processes into the Black option model. Nevertheless, taking into account that midquotes do not have to be the proper representation of market prices as probably transactional data do, we decide to compare in this paper the results of the research conducted on HF transactional and midquotes data. This comparison shows that the results do not differ significantly between these two approaches and that BIV model significantly outperforms other models, especially BRV model with the latter producing the worst results. Additionally, we provide the discussion of liquidity issue in the context of emerging derivatives market. Finally, after exclusion of spurious outliers we observe significant patterns in option pricing that are not visible on the raw data.

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File URL: http://www.wne.uw.edu.pl/inf/wyd/WP/WNE_WP38.pdf
File Function: First version, 2010
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Bibliographic Info

Paper provided by Faculty of Economic Sciences, University of Warsaw in its series Working Papers with number 2010-15.

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Length: 30 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:war:wpaper:2010-15

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Related research

Keywords: option pricing models; financial market volatility; high-frequency financial data; midquotes data; transactional data; realized volatility; implied volatility; microstructure bias; emerging markets;

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References

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  1. Kaushik I. Amin & Robert A. Jarrow, 1992. "Pricing Options On Risky Assets In A Stochastic Interest Rate Economy," Mathematical Finance, Wiley Blackwell, vol. 2(4), pages 217-237.
  2. Corrado, Charles J & Su, Tie, 1996. "Skewness and Kurtosis in S&P 500 Index Returns Implied by Option Prices," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 19(2), pages 175-92, Summer.
  3. V. L. Martin & G. M. Martin & G. C. Lim, 2005. "Parametric pricing of higher order moments in S&P500 options," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(3), pages 377-404.
  4. Yacine Aït-Sahalia & Jean Jacod, 2010. "Analyzing the Spectrum of Asset Returns: Jump and Volatility Components in High Frequency Data," NBER Working Papers 15808, National Bureau of Economic Research, Inc.
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Cited by:
  1. Katarzyna Toporek, 2012. "Simple is better. Empirical comparison of American option valuation methods," Ekonomia journal, Faculty of Economic Sciences, University of Warsaw, vol. 29.

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