Title :
Option Pricing under Unknown Volatility: An Agent-Based Modeling and Simulation Approach
Author :
Shu Lin Zhang ; De Yu Feng ; Shu Ping Wang
Author_Institution :
Coll. of Econ. & Bus. Adm., North China Univ. of Technol., Beijing, China
Abstract :
We modeled an artificial European option market with unknown volatility using an agent-based modeling and simulation approach. Contrary to the standard Black and Scholes model with "known" volatility, there is significant pricing bias (market price/theoretical price) in the presence of unknown volatility. Moreover, the unknown drift has a significant nonlinear effect in the pricing bias. Finally, pricing bias tends to decrease as the drift increasing in the case of low volatility. Our approach may serve as a first step towards the goal of option pricing in disequilibrium with unknown volatility.
Keywords :
digital simulation; multi-agent systems; pricing; share prices; stock markets; Black and Scholes model; agent-based modeling; agent-based simulation; artificial European option market; nonlinear effect; option pricing; unknown drift; unknown volatility; Bayesian methods; Context modeling; Educational institutions; Equations; Instruments; Measurement uncertainty; Mechanical factors; Parameter estimation; Pricing; Security; agent-based simulation; disequilibrium model; option pricing; unknown volatility;
Conference_Titel :
Information and Financial Engineering, 2009. ICIFE 2009. International Conference on
Conference_Location :
Singapore
Print_ISBN :
978-0-7695-3606-4
DOI :
10.1109/ICIFE.2009.25
