Improved Option Pricing Using Artificial Neural Networks and Bootstrap Methods

Paul R. Lajbcygier · Jerome T. Connor

59 citations0/0 files storedInternational Journal of Neural Systems

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

Abstract

A hybrid neural network is used to predict the difference between the conventional option-pricing model and observed intraday option prices for stock index option futures. Confidence intervals derived with bootstrap methods are used in a trading strategy that only allows trades outside the estimated range of spurious model fits to be executed. Whilst hybrid neural network option pricing models can improve predictions they have bias. The hybrid option-pricing bias can be reduced with bootstrap methods. A modified bootstrap predictor is indexed by a parameter that allows the predictor to range from a pure bootstrap predictor, to a hybrid predictor, and finally the bagging predictor. The modified bootstrap predictor outperforms the hybrid and bagging predictors. Greatly improved performance was observed on the boundary of the training set and where only sparse training data exists. Finally, bootstrap bias estimates were studied.

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References

1973The Pricing of Options and Corporate Liabilities 1973Theory of Rational Option Pricing 2005Theory of rational option pricing 1987The Pricing of Options on Assets with Stochastic Volatilities 1984A Simple Implicit Measure of the Effective Bid-Ask Spread in an Efficient Market 1994Implied Binomial Trees 1987The Pricing of Options on Assets with Stochastic Volatilities 1998Nonparametric Estimation of State‐Price Densities Implicit in Financial Asset Prices

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2009Improving option price forecasts with neural networks and support vector regressions 2018Generative Bayesian neural network model for risk-neutral pricing of American index options 2016A new hybrid parametric and machine learning model with homogeneity hint for European-style index option pricing 2007Model Risk for European-Style Stock Index Options 2004Improving Option Pricing With the Product Constrained Hybrid Neural Network 2020

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