Modeling the non-linear behaviour of option price deviations from the Black Scholes model
Purpose – The purpose of this paper is to test for and model non-linearities in option price deviations from the Black Scholes (BS) model in FTSE 100 index options over the time period 1997-2006. Design/methodology/approach – The economic specification and estimation methodology is outlined, the data are discussed, and the empirical results are analysed. Findings – The tests reject the linearity hypothesis and the paper shows that the exponential smooth transition autoregressive model is capable of capturing the non-linear behaviour of option price misalignments. The paper finds that even though FTSE 100 index options are heavily traded, transaction costs prevent rapid adjustments of option prices from their “optimal” value. Originality/value – The paper presents new empirical evidence, which explicitly allows for the possibility that option price misalignments from the BS price can be characterised by a non-linear mean reverting process.
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): 37 (2010)
Issue (Month): 1 (January)
|Contact details of provider:|| Web page: http://www.emeraldinsight.com|
|Order Information:|| Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK|
Web: http://www.emeraldinsight.com/jes.htm Email:
When requesting a correction, please mention this item's handle: RePEc:eme:jespps:v:37:y:2010:i:1:p:26-35. 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: (Virginia Chapman)
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.