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Option Pricing Model Biases: Bayesian and Markov Chain Monte Carlo Regression Analysis

Author

Listed:
  • Sharif Mozumder

    (University of Dhaka)

  • Taufiq Choudhry

    (University of Southampton)

  • Michael Dempsey

    (Ton Duc Thang University)

Abstract

We investigate systematic and unsystematic option pricing biases in (a) pure jump Lévy, (b) jump-diffusion, (c) stochastic volatility, and (d) GARCH models applied to the Black–Scholes–Merton model. We use options data for trades on the S&P500 index from the CBOE. In addition to standard ordinary least square regression, we employ Bayesian regression and Markov Chain Monte Carlo regression to investigate the moneyness and maturity biases of the models. We demonstrate the usefulness of these advanced methodologies as compared to the benchmark techniques.

Suggested Citation

  • Sharif Mozumder & Taufiq Choudhry & Michael Dempsey, 2021. "Option Pricing Model Biases: Bayesian and Markov Chain Monte Carlo Regression Analysis," Computational Economics, Springer;Society for Computational Economics, vol. 57(4), pages 1287-1305, April.
    • Handle: RePEc:kap:compec:v:57:y:2021:i:4:d:10.1007_s10614-020-10029-x
    DOI: 10.1007/s10614-020-10029-x
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    References listed on IDEAS

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