• DocumentCode
    1946543
  • Title

    Option pricing with informed judgment

  • Author

    Aboura, Khalid ; Agbinya, Johnson I.

  • Author_Institution
    Dept. of Quantitative Methods, Univ. of Dammam, Dammam, Saudi Arabia
  • fYear
    2013
  • fDate
    13-17 July 2013
  • Firstpage
    218
  • Lastpage
    223
  • Abstract
    The Black-Scholes formula is one of the most successful mathematical models in finance, generating a global industry and resulting in two Nobel prizes. And yet, some speculate about its contribution to the last global financial crisis due to the abuse of a model that wasn´t quite perfect. Some of the automation may have led to deficiencies in estimation. An adjustment to the model could be made through the input of expert opinion, as a way to calibrate and estimate better. The use of informed judgment has been prevalent in the statistical literature. It allows for the incorporation of expert opinion into a statistical analysis through a prior distribution. We introduce a method for the elicitation of the expert´s prior distribution of the volatility in the Black-Scholes option pricing model. This work complements a Bayesian analysis to derive the prior and posterior densities of a European call option.
  • Keywords
    finance; pricing; statistical analysis; statistical distributions; Bayesian analysis; Black-Scholes formula; Black-Scholes option pricing model; European call option; expert opinion; finance; global financial crisis; global industry; informed judgment; mathematical model; posterior density; prior density; prior distribution; statistical analysis; statistical literature; Australia; Bayes methods; Calibration; Europe; Lead; Bayesian approaches; Black-Scholes model; Mathematics of Finance; Option Pricing; Volatility;
  • fLanguage
    English
  • Publisher
    ieee
  • Conference_Titel
    Information Science, Computing and Telecommunications (PACT), 2013 Pan African International Conference on
  • Conference_Location
    Lusaka
  • Type

    conf

  • DOI
    10.1109/SCAT.2013.7055092
  • Filename
    7055092