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Linear regression for currency European call option pricing in incomplete markets

Author

Listed:
  • Ahmad W. Bitar

    (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 Least squares is the traditional regression technique for pricing European options in an incomplete markets. However, the least squares is quite sensitive to even a single outlier in the data, and thus, the predicted option price may potentially deviate from the true unknown one. To handle the problem of outliers, this paper aims to develop two different option pricing prediction strategies mainly based on the idea of robust linear regression. The proposed robust techniques are evaluated on numerical data, and the results of which demonstrate their effectiveness for European call option pricing on exchange rates.

Suggested Citation

  • Ahmad W. Bitar, 2024. "Linear regression for currency European call option pricing in incomplete markets," Working Papers hal-04776068, HAL.
    • Handle: RePEc:hal:wpaper:hal-04776068
    as

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