De-noising option prices with the wavelet method
Financial time series are known to carry noise. Hence, techniques to de-noise such data deserve great attention. Wavelet analysis is widely used in science and engineering to de-noise data. In this paper we show, through the use of Monte Carlo simulations, the power of the wavelet method in the de-noising of option price data. We also find that the estimation of risk-neutral density functions and out-of-sample price forecasting is significantly improved after noise is removed using the wavelet method.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 222 (2012)
Issue (Month): 1 ()
|Contact details of provider:|| Web page: http://www.elsevier.com/locate/eor|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mark J. Jensen, 1997.
"Using Wavelets to Obtain a Consistent Ordinary Least Squares Estimator of the Long Memory Parameter,"
- Jensen, Mark J, 1999. "Using wavelets to obtain a consistent ordinary least squares estimator of the long-memory parameter," MPRA Paper 39152, University Library of Munich, Germany.
- Chiu, Nan-Chieh & Fang, Shu-Cherng & Lavery, John E. & Lin, Jen-Yen & Wang, Yong, 2008. "Approximating term structure of interest rates using cubic L1 splines," European Journal of Operational Research, Elsevier, vol. 184(3), pages 990-1004, February.
- Jiang, George J., 1998. "Nonparametric Modeling of U.S. Interest Rate Term Structure Dynamics and Implications on the Prices of Derivative Securities," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(04), pages 465-497, December.
- Haven, Emmanuel & Liu, Xiaoquan & Ma, Chenghu & Shen, Liya, 2009. "Revealing the implied risk-neutral MGF from options: The wavelet method," Journal of Economic Dynamics and Control, Elsevier, vol. 33(3), pages 692-709, March.
- Sun, Edward W. & Meinl, Thomas, 2012. "A new wavelet-based denoising algorithm for high-frequency financial data mining," European Journal of Operational Research, Elsevier, vol. 217(3), pages 589-599.
- Jaisimha Manchaldore & Imon Palit & Oleg Soloviev, 2010. "Wavelet decomposition for intra-day volume dynamics," Quantitative Finance, Taylor & Francis Journals, vol. 10(8), pages 917-930.
- van Wezel, Michiel & Potharst, Rob, 2007. "Improved customer choice predictions using ensemble methods," European Journal of Operational Research, Elsevier, vol. 181(1), pages 436-452, August.
- Jensen, Mark J., 2000.
"An alternative maximum likelihood estimator of long-memory processes using compactly supported wavelets,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 24(3), pages 361-387, March.
- Mark J. Jensen, 1997. "An Alternative Maximum Likelihood Estimator of Long-Memeory Processes Using Compactly Supported Wavelets," Econometrics 9709002, EconWPA.
- Fernandez, Viviana, 2006. "The CAPM and value at risk at different time-scales," International Review of Financial Analysis, Elsevier, vol. 15(3), pages 203-219.
- Weron, Rafal, 2008.
"Heavy-tails and regime-switching in electricity prices,"
10424, University Library of Munich, Germany.
- Rafał Weron, 2009. "Heavy-tails and regime-switching in electricity prices," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 69(3), pages 457-473, July.
- Gençay, Ramazan & Selçuk, Faruk & Whitcher, Brandon, 2001. "Differentiating intraday seasonalities through wavelet multi-scaling," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 289(3), pages 543-556.
- Davidson, Russell & Labys, Walter C & Lesourd, Jean-Baptiste, 1998.
"Wavelet Analysis of Commodity Price Behavior,"
Springer;Society for Computational Economics, vol. 11(1-2), pages 103-28, April.
- Asgharian, Hossein, 2011. "A conditional asset-pricing model with the optimal orthogonal portfolio," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1027-1040, May.
- Gallegati Marco & Gallegati Mauro, 2007. "Wavelet Variance Analysis of Output in G-7 Countries," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 11(3), pages 1-25, September.
- Kim Sangbae & In Francis Haeuck, 2003. "The Relationship Between Financial Variables and Real Economic Activity: Evidence From Spectral and Wavelet Analyses," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 7(4), pages 1-18, December.
- Ogden, Todd & Parzen, Emanuel, 1996. "Data dependent wavelet thresholding in nonparametric regression with change-point applications," Computational Statistics & Data Analysis, Elsevier, vol. 22(1), pages 53-70, June.
- Ramsey James B. & Lampart Camille, 1998. "The Decomposition of Economic Relationships by Time Scale Using Wavelets: Expenditure and Income," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 3(1), pages 1-22, April.
- Francis In & Sangbae Kim, 2006. "The Hedge Ratio and the Empirical Relationship between the Stock and Futures Markets: A New Approach Using Wavelet Analysis," The Journal of Business, University of Chicago Press, vol. 79(2), pages 799-820, March.
- Robert R. Bliss & Nikolaos Panigirtzoglou, 2004. "Option-Implied Risk Aversion Estimates," Journal of Finance, American Finance Association, vol. 59(1), pages 407-446, 02.
- Zhou S. & Shen X., 2001. "Spatially Adaptive Regression Splines and Accurate Knot Selection Schemes," Journal of the American Statistical Association, American Statistical Association, vol. 96, pages 247-259, March.
- Florez-Lopez, Raquel, 2007. "Modelling of insurers' rating determinants. An application of machine learning techniques and statistical models," European Journal of Operational Research, Elsevier, vol. 183(3), pages 1488-1512, December.
- Yongmiao Hong & Chihwa Kao, 2004.
"Wavelet-Based Testing for Serial Correlation of Unknown Form in Panel Models,"
Econometric Society, vol. 72(5), pages 1519-1563, 09.
- Yongmiao Hong & Chihwa Kao, 2000. "Wavelet-Based Testing for Serial Correlation of Unknown Form in Panel Models," Center for Policy Research Working Papers 32, Center for Policy Research, Maxwell School, Syracuse University.
- Dong, Ming & He, David, 2007. "Hidden semi-Markov model-based methodology for multi-sensor equipment health diagnosis and prognosis," European Journal of Operational Research, Elsevier, vol. 178(3), pages 858-878, May.
- Kim, Sangbae & In, Francis, 2005. "The relationship between stock returns and inflation: new evidence from wavelet analysis," Journal of Empirical Finance, Elsevier, vol. 12(3), pages 435-444, June.
- Ramazan Genay & Faruk Seļuk & Brandon Whitcher, 2003. "Systematic risk and timescales," Quantitative Finance, Taylor & Francis Journals, vol. 3(2), pages 108-116.
- Christopher Zapart, 2002. "Stochastic volatility options pricing with wavelets and artificial neural networks," Quantitative Finance, Taylor & Francis Journals, vol. 2(6), pages 487-495.
- Gençay, Ramazan & Selçuk, Faruk & Whitcher, Brandon, 2001. "Scaling properties of foreign exchange volatility," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 289(1), pages 249-266.
- Connor Jeff & Rossiter Rosemary, 2005. "Wavelet Transforms and Commodity Prices," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 9(1), pages 1-22, March.
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
- Lada, Emily K. & Wilson, James R., 2006. "A wavelet-based spectral procedure for steady-state simulation analysis," European Journal of Operational Research, Elsevier, vol. 174(3), pages 1769-1801, November.
- Gencay, Ramazan & Selcuk, Faruk & Whitcher, Brandon, 2005. "Multiscale systematic risk," Journal of International Money and Finance, Elsevier, vol. 24(1), pages 55-70, February.
- A. Antoniadis, 2002. "Wavelet thresholding for some classes of non-Gaussian noise," Statistica Neerlandica, Netherlands Society for Statistics and Operations Research, vol. 56(4), pages 434-453.
- Bliss, Robert R. & Panigirtzoglou, Nikolaos, 2002. "Testing the stability of implied probability density functions," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 381-422, March.
- Abramovich, Felix & Benjamini, Yoav, 1996. "Adaptive thresholding of wavelet coefficients," Computational Statistics & Data Analysis, Elsevier, vol. 22(4), pages 351-361, August.
When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:222:y:2012:i:1:p:104-112. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.