IDEAS home Printed from https://ideas.repec.org/p/arx/papers/2506.17511.html
   My bibliography  Save this paper

Empirical Models of the Time Evolution of SPX Option Prices

Author

Listed:
  • Alessio Brini
  • David A. Hsieh
  • Patrick Kuiper
  • Sean Moushegian
  • David Ye

Abstract

The key objective of this paper is to develop an empirical model for pricing SPX options that can be simulated over future paths of the SPX. To accomplish this, we formulate and rigorously evaluate several statistical models, including neural network, random forest, and linear regression. These models use the observed characteristics of the options as inputs -- their price, moneyness and time-to-maturity, as well as a small set of external inputs, such as the SPX and its past history, dividend yield, and the risk-free rate. Model evaluation is performed on historical options data, spanning 30 years of daily observations. Significant effort is given to understanding the data and ensuring explainability for the neural network. A neural network model with two hidden layers and four neurons per layer, trained with minimal hyperparameter tuning, performs well against the theoretical Black-Scholes-Merton model for European options, as well as two other empirical models based on the random forest and the linear regression. It delivers arbitrage-free option prices without requiring these conditions to be imposed.

Suggested Citation

  • Alessio Brini & David A. Hsieh & Patrick Kuiper & Sean Moushegian & David Ye, 2025. "Empirical Models of the Time Evolution of SPX Option Prices," Papers 2506.17511, arXiv.org.
  • Handle: RePEc:arx:papers:2506.17511
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/2506.17511
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Laurens Van Mieghem & Antonis Papapantoleon & Jonas Papazoglou-Hennig, 2023. "Machine learning for option pricing: an empirical investigation of network architectures," Papers 2307.07657, arXiv.org.
    2. Lirong Gan & Wei-han Liu, 2024. "Correction to: Option Pricing Based on the Residual Neural Network," Computational Economics, Springer;Society for Computational Economics, vol. 64(3), pages 1937-1937, September.
    3. Rama Cont & Jose da Fonseca, 2002. "Dynamics of implied volatility surfaces," Quantitative Finance, Taylor & Francis Journals, vol. 2(1), pages 45-60.
    4. Kim Christensen & Mathias Siggaard & Bezirgen Veliyev, 2023. "A Machine Learning Approach to Volatility Forecasting," Journal of Financial Econometrics, Oxford University Press, vol. 21(5), pages 1680-1727.
    5. Bollerslev, Tim & Gibson, Michael & Zhou, Hao, 2011. "Dynamic estimation of volatility risk premia and investor risk aversion from option-implied and realized volatilities," Journal of Econometrics, Elsevier, vol. 160(1), pages 235-245, January.
    6. Ramos, Henrique Pinto & Righi, Marcelo Brutti, 2020. "Liquidity, implied volatility and tail risk: A comparison of liquidity measures," International Review of Financial Analysis, Elsevier, vol. 69(C).
    7. Toby Daglish & John Hull & Wulin Suo, 2007. "Volatility surfaces: theory, rules of thumb, and empirical evidence," Quantitative Finance, Taylor & Francis Journals, vol. 7(5), pages 507-524.
    8. Bakshi, Gurdip & Cao, Charles & Chen, Zhiwu, 1997. "Empirical Performance of Alternative Option Pricing Models," Journal of Finance, American Finance Association, vol. 52(5), pages 2003-2049, December.
    9. Brini, Alessio & Lenz, Jimmie, 2024. "Pricing cryptocurrency options with machine learning regression for handling market volatility," Economic Modelling, Elsevier, vol. 136(C).
    10. Viviana Fanelli & Maren Diane Schmeck, 2019. "On the seasonality in the implied volatility of electricity options," Quantitative Finance, Taylor & Francis Journals, vol. 19(8), pages 1321-1337, August.
    11. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    12. Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144.
    13. Dimitris Bertsimas & Cheol Woo Kim, 2023. "A Prescriptive Machine Learning Approach to Mixed-Integer Convex Optimization," INFORMS Journal on Computing, INFORMS, vol. 35(6), pages 1225-1241, November.
    14. Xiangyu Wei & Zhilong Xie & Rui Cheng & Di Zhang & Qing Li, 2021. "An Intelligent Learning and Ensembling Framework for Predicting Option Prices," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 57(15), pages 4237-4260, December.
    15. Lirong Gan & Wei-han Liu, 2024. "Option Pricing Based on the Residual Neural Network," Computational Economics, Springer;Society for Computational Economics, vol. 63(4), pages 1327-1347, April.
    16. 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 637-654, May-June.
    17. A Itkin, 2019. "Deep learning calibration of option pricing models: some pitfalls and solutions," Papers 1906.03507, arXiv.org.
    18. Scott Mixon, 2002. "Factors explaining movements in the implied volatility surface," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 22(10), pages 915-937, October.
    19. Ludovic Goudenège & Andrea Molent & Antonino Zanette, 2020. "Machine learning for pricing American options in high-dimensional Markovian and non-Markovian models," Quantitative Finance, Taylor & Francis Journals, vol. 20(4), pages 573-591, April.
    20. David S. Bates, 2022. "Empirical Option Pricing Models," Annual Review of Financial Economics, Annual Reviews, vol. 14(1), pages 369-389, November.
    21. Banerjee, Prithviraj S. & Doran, James S. & Peterson, David R., 2007. "Implied volatility and future portfolio returns," Journal of Banking & Finance, Elsevier, vol. 31(10), pages 3183-3199, October.
    22. Jay Cao & Jacky Chen & John Hull, 2020. "A neural network approach to understanding implied volatility movements," Quantitative Finance, Taylor & Francis Journals, vol. 20(9), pages 1405-1413, September.
    23. Büchner, Matthias & Kelly, Bryan, 2022. "A factor model for option returns," Journal of Financial Economics, Elsevier, vol. 143(3), pages 1140-1161.
    24. Blanka Horvath & Aitor Muguruza & Mehdi Tomas, 2021. "Deep learning volatility: a deep neural network perspective on pricing and calibration in (rough) volatility models," Quantitative Finance, Taylor & Francis Journals, vol. 21(1), pages 11-27, January.
    25. Bates, David S., 2003. "Empirical option pricing: a retrospection," Journal of Econometrics, Elsevier, vol. 116(1-2), pages 387-404.
    26. Turan G Bali & Heiner Beckmeyer & Mathis Mörke & Florian Weigert & Stefano Giglio, 2023. "Option Return Predictability with Machine Learning and Big Data," The Review of Financial Studies, Society for Financial Studies, vol. 36(9), pages 3548-3602.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kozarski, R., 2013. "Pricing and hedging in the VIX derivative market," Other publications TiSEM 221fefe0-241e-4914-b6bd-c, Tilburg University, School of Economics and Management.
    2. Christoffersen, Peter & Heston, Steve & Jacobs, Kris, 2006. "Option valuation with conditional skewness," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 253-284.
    3. Peter Christoffersen & Redouane Elkamhi & Bruno Feunou & Kris Jacobs, 2010. "Option Valuation with Conditional Heteroskedasticity and Nonnormality," The Review of Financial Studies, Society for Financial Studies, vol. 23(5), pages 2139-2183.
    4. Nappo, Giovanna & Marchetti, Fabio Massimo & Vagnani, Gianluca, 2023. "Traders’ heterogeneous beliefs about stock volatility and the implied volatility skew in financial options markets," Finance Research Letters, Elsevier, vol. 53(C).
    5. F. Leung & M. Law & S. K. Djeng, 2024. "Deterministic modelling of implied volatility in cryptocurrency options with underlying multiple resolution momentum indicator and non-linear machine learning regression algorithm," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 10(1), pages 1-25, December.
    6. Torben G. Andersen & Tim Bollerslev & Peter F. Christoffersen & Francis X. Diebold, 2005. "Volatility Forecasting," PIER Working Paper Archive 05-011, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    7. Andersen, Torben G. & Bollerslev, Tim & Christoffersen, Peter F. & Diebold, Francis X., 2006. "Volatility and Correlation Forecasting," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 1, chapter 15, pages 777-878, Elsevier.
    8. Sharif Mozumder & Bakhtear Talukdar & M. Humayun Kabir & Bingxin Li, 2024. "Non-linear volatility with normal inverse Gaussian innovations: ad-hoc analytic option pricing," Review of Quantitative Finance and Accounting, Springer, vol. 62(1), pages 97-133, January.
    9. Christoffersen, Peter & Jacobs, Kris & Chang, Bo Young, 2013. "Forecasting with Option-Implied Information," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 581-656, Elsevier.
    10. Henri Bertholon & Alain Monfort & Fulvio Pegoraro, 2006. "Pricing and Inference with Mixtures of Conditionally Normal Processes," Working Papers 2006-28, Center for Research in Economics and Statistics.
    11. Diep Duong & Norman R. Swanson, 2011. "Volatility in Discrete and Continuous-Time Models: A Survey with New Evidence on Large and Small Jumps," Advances in Econometrics, in: Missing Data Methods: Time-Series Methods and Applications, pages 179-233, Emerald Group Publishing Limited.
    12. Robert F. Engle & Emil N. Siriwardane, 2018. "Structural GARCH: The Volatility-Leverage Connection," The Review of Financial Studies, Society for Financial Studies, vol. 31(2), pages 449-492.
    13. Byun, Suk Joon & Jeon, Byoung Hyun & Min, Byungsun & Yoon, Sun-Joong, 2015. "The role of the variance premium in Jump-GARCH option pricing models," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 38-56.
    14. Jin Zhang & Yi Xiang, 2008. "The implied volatility smirk," Quantitative Finance, Taylor & Francis Journals, vol. 8(3), pages 263-284.
    15. Bing-Huei Lin & Mao-Wei Hung & Jr-Yan Wang & Ping-Da Wu, 2013. "A lattice model for option pricing under GARCH-jump processes," Review of Derivatives Research, Springer, vol. 16(3), pages 295-329, October.
    16. Guo, Jingjun & Kang, Weiyi & Wang, Yubing, 2024. "Multi-perspective option price forecasting combining parametric and non-parametric pricing models with a new dynamic ensemble framework," Technological Forecasting and Social Change, Elsevier, vol. 204(C).
    17. Xinglin Yang, 2018. "Good jump, bad jump, and option valuation," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(9), pages 1097-1125, September.
    18. Bondarenko, Oleg, 2014. "Variance trading and market price of variance risk," Journal of Econometrics, Elsevier, vol. 180(1), pages 81-97.
    19. Rombouts, Jeroen V.K. & Stentoft, Lars, 2015. "Option pricing with asymmetric heteroskedastic normal mixture models," International Journal of Forecasting, Elsevier, vol. 31(3), pages 635-650.
    20. Fengler, Matthias R. & Härdle, Wolfgang & Mammen, Enno, 2003. "Implied volatility string dynamics," SFB 373 Discussion Papers 2003,54, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:2506.17511. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.