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Robust European Call Option Pricing via Linear Regression

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  • Ahmad W. Bitar

    (LIST3N - Laboratoire Informatique et Société Numérique - UTT - Université de Technologie de Troyes, LIST3N - MSAD - LIST3N - Modélisation, stochastique, apprentissage et décision - LIST3N - Laboratoire Informatique et Société Numérique - UTT - Université de Technologie de Troyes, UTT - Université de Technologie de Troyes)

Abstract

The one-period trinomial option pricing model is well-known in the literature as it considers three possible movement directions of the asset price. However, by equating the price of the option to the self-financing hedging portfolio at maturity, this yields a linear system of three equations with two unknowns that correspond to the coefficients for the delta-hedging portfolio. Hence, the trinomial model is said to be incomplete, that is, there exists an infinite number of equivalent martingale measures. To deal with this incompleteness, this paper aims to price options via some robust linear regression techniques in order to mainly handle the problem of outliers that the least squares fails to consider. The proposed robust techniques are evaluated on numerical data, and the results of which demonstrate their effectiveness for European call option pricing.

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  • Ahmad W. Bitar, 2025. "Robust European Call Option Pricing via Linear Regression," Post-Print hal-04754957, HAL.
    • Handle: RePEc:hal:journl:hal-04754957
    Note: View the original document on HAL open archive server: https://utt.hal.science/hal-04754957v3
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    References listed on IDEAS

    as
    1. Boyle, Phelim P., 1988. "A Lattice Framework for Option Pricing with Two State Variables," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(1), pages 1-12, March.
    2. Takahashi, Hajime & 高橋, 一, 2000. "A Note on Pricing Derivartives in an Incomplete Market," Discussion Papers 2000-05, Graduate School of Economics, Hitotsubashi University.
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