Articlegreen2004

Black–Scholes versus artificial neural networks in pricing FTSE 100 options

Julia A. Bennell · Charles M. S. Sutcliffe

82 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

Abstract This paper compares the performance of Black–Scholes with an artificial neural network (ANN) in pricing European‐style call options on the FTSE 100 index. It is the first extensive study of the performance of ANNs in pricing UK options, and the first to allow for dividends in the closed‐form model. For out‐of‐the‐money options, the ANN is clearly superior to Black–Scholes. For in‐the‐money options, if the sample space is restricted by excluding deep in‐the‐money and long maturity options (3.4% of total volume), then the performance of the ANN is comparable to that of Black–Scholes. The superiority of the ANN is a surprising result, given that European‐style equity options are the home ground of Black–Scholes, and suggests that ANNs may have an important role to play in pricing other options for which there is either no closed‐form model, or the closed‐form model is less successful than is Black–Scholes for equity options. Copyright © 2005 John Wiley & Sons, Ltd.

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References

1973The Pricing of Options and Corporate Liabilities 1973Theory of Rational Option Pricing 2005Theory of rational option pricing 1976The pricing of commodity contracts 1997Empirical Performance of Alternative Option Pricing Models 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 199520 Testing option pricing models

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2023Predictive Learning Methods to Price European Options Using Ensemble Model and Multi-asset Data 2007Model Risk for European-Style Stock Index Options 2017Gated Neural Networks for Option Pricing: Rationality by Design

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