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

Author

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  • 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.

Suggested Citation

  • Ryszard Kokoszczyński & Paweł Sakowski & Robert Ślepaczuk, 2010. "Midquotes or Transactional Data? The Comparison of Black Model on HF Data," Working Papers 2010-15, Faculty of Economic Sciences, University of Warsaw.
    • Handle: RePEc:war:wpaper:2010-15
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    File URL: http://www.wne.uw.edu.pl/inf/wyd/WP/WNE_WP38.pdf
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    References listed on IDEAS

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    4. 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.
    5. Kaushik I. Amin & Robert A. Jarrow, 1992. "Pricing Options On Risky Assets In A Stochastic Interest Rate Economy1," Mathematical Finance, Wiley Blackwell, vol. 2(4), pages 217-237, October.
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    Cited by:

    1. Maciej Wysocki & Robert Ślepaczuk, 2020. "Artificial Neural Networks Performance in WIG20 Index Options Pricing," Working Papers 2020-19, Faculty of Economic Sciences, University of Warsaw.
    2. 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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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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