Martingalized historical approach for option pricing |
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| Authors: | C Chorro D Guégan F Ielpo |
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| Institution: | 1. United States Department of Agriculture, Agricultural Research Service, Beltsville Agricultural Research Center, Animal Parasitic Diseases Laboratory, Building 1001, Beltsville, MD 20705-2350, USA;2. United States Department of Agriculture, Animal and Plant Health Inspection Service, Wildlife Services, 2803 Jolly Road Suite 100, Okemos, MI 48864, USA;3. United States Department of Agriculture, Animal and Plant Health Inspection Service, Wildlife Services, 4101 LaPorte Avenue, Fort Collins, CO 80521, USA;4. United States Department of Agriculture, Animal and Plant Health Inspection Service, Wildlife Services, 9 Main Street #1 – M, Sutton, MA 01590, USA;5. United States Department of Agriculture, Animal and Plant Health Inspection Service, Wildlife Services, 140C Locust Grove Road, Pittstown, NJ 08867, USA;6. Department of Microbiology, The University of Tennessee, Knoxville, TN 37996-0845, USA;1. Department of Mechanical Engineering, Liaoning Shihua University, Fushun 113001, PR China;2. School of Mechanical and Chemical Engineering, The University of Western Australia, Perth, WA 6009, Australia;1. Dip. Matematica e Informatica, Università degli Studi di Perugia, via Vanvitelli 1, 06126, Perugia, Italy;2. Dip. Economia, Finanza e Statistica, Università degli Studi di Perugia, Italy |
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| Abstract: | In a discrete time option pricing framework, we compare the empirical performance of two pricing methodologies, namely the affine stochastic discount factor (SDF) and the empirical martingale correction methodologies. Using a CAC 40 options dataset, the differences are found to be small: the higher order moment correction involved in the SDF approach may not be that essential to reduce option pricing errors. This paper puts into evidence the fact that an appropriate modelling under the historical measure associated with an adequate correction (that we call here a “martingale correction”) permits to provide option prices which are close to market ones. |
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