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Comparison of Black-Scholes and Garch Option Models on The Kompas100 Index With a Long Straddle Strategy During 2008-2021

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  • Riko Hendrawan

    (Telkom University, Indonesia Author-2-Name: M. Dirga Aulia Hasibuan Author-2-Workplace-Name: Telkom University, Indonesia Author-3-Name: Author-3-Workplace-Name: Author-4-Name: Author-4-Workplace-Name: Author-5-Name: Author-5-Workplace-Name: Author-6-Name: Author-6-Workplace-Name: Author-7-Name: Author-7-Workplace-Name: Author-8-Name: Author-8-Workplace-Name:)

Abstract

" Objective - This study aims to look at the use of contract options through Black Scholes and GARCH modeling on the Kompas100 Index with a long straddle strategy both in crisis and non-crisis. Methodology – The data used for the observation period are the closing price of the Kompas100 Index from 2008 to 2021. The testing lasts one month (from February 2008 to December 2021), and three months (from April 2008 to December 2021). To get the results, the average mean square errors (AMSE) of the two models were compared by implementing the long straddle strategy, meaning that the model is better if the percentage number is lower. Findings – Over a one-month period during the crisis, GARCH modeling performed better than Black Scholes modeling, with an error rate of 2.5539% for call options. Meanwhile, Black Scholes's modeling was better on put options with an error rate of 1.9725%. In the 3-month period, GARCH modeling was better, with error rates for call and put options of 10.3882% and 7.4282%, respectively. In non-crisis years, GARCH modeling beat Black Scholes modeling during a one-month period with an error rate of 0.2689%, while Black Scholes modeling was better on put options with an error rate of 0.2943%. In addition, over a 3-month period, Black Scholes modeling performs better, with error rates on call and put options of 0.8821% and 1.0337%, respectively. Novelty – The longer the agreement term, the greater the error rate in both option models. The study results revealed that the error rate for the 3-month period was higher than the 1-month period. Type of Paper - Empirical/ Review"

Suggested Citation

  • Riko Hendrawan, 2023. "Comparison of Black-Scholes and Garch Option Models on The Kompas100 Index With a Long Straddle Strategy During 2008-2021 ," GATR Journals jfbr208, Global Academy of Training and Research (GATR) Enterprise.
    • Handle: RePEc:gtr:gatrjs:jfbr208
    DOI: https://doi.org/10.35609/jfbr.2023.7.4(1)
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    References listed on IDEAS

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    1. Aparna Bhat & Kirti Arekar, 2016. "Empirical Performance of Black-Scholes and GARCH Option Pricing Models during Turbulent Times: The Indian Evidence," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(3), pages 123-136, March.
    2. Bentes, Sonia R., 2015. "Forecasting volatility in gold returns under the GARCH, IGARCH and FIGARCH frameworks: New evidence," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 438(C), pages 355-364.
    3. Sasikanta Tripathy & Abdul Rahman, 2013. "Forecasting Daily Stock Volatility Using GARCH Model: A Comparison Between BSE and SSE," The IUP Journal of Applied Finance, IUP Publications, vol. 19(4), pages 71-83, October.
    4. Deannes Isynuwardhana & Gisyari Nurul Istiqamah Surur, 2018. "Return Analysis on Contract Option Using Long Straddle Strategy and Short Straddle Strategy with Black Scholes," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 8(4), pages 16-20, October.
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    More about this item

    Keywords

    Option; Black Scholes; GARCH; AMSE; Long Straddle;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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