Article2012

PRICING AND HEDGING SHORT STERLING OPTIONS USING NEURAL NETWORKS

20 citations0/0 files storedIntelligent systems in accounting, finance and management/Intelligent systems in accounting, finance & management

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Stochastic processes and financial applications Neural Networks and Applications Stock Market Forecasting Methods

Abstract

SUMMARY This paper compares the performance of artificial neural networks (ANNs) with that of the modified Black model in both pricing and hedging short sterling options. Using high‐frequency data, standard and hybrid ANNs are trained to generate option prices. The hybrid ANN is significantly superior to both the modified Black model and the standard ANN in pricing call and put options. Hedge ratios for hedging short sterling options positions using short sterling futures are produced using the standard and hybrid ANN pricing models, the modified Black model, and also standard and hybrid ANNs trained directly on the hedge ratios. The performance of hedge ratios from ANNs directly trained on actual hedge ratios is significantly superior to those based on a pricing model, and to the modified Black model. Copyright © 2012 John Wiley & Sons, Ltd.

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1976The pricing of commodity contracts 1975Fact and Fantasy in the Use of Options 1994A Nonparametric Approach to Pricing and Hedging Derivative Securities Via Learning Networks 1985Nonparametric Tests of Alternative Option Pricing Models Using All Reported Trades and Quotes on the 30 Most Active CBOE Option Classes from August 23, 1976 Through August 31, 1978 2000Option price forecasting using neural networks 2000Pricing and hedging derivative securities with neural networks and a homogeneity hint 2001Pricing and hedging derivative securities with neural networks: Bayesian regularization, early stopping, and bagging 2004Accounting for Biases in Black-Scholes

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