Empirical Examinations of the Black-Scholes Model and Merton Jump-Diffusion Model in the Chinese Options Market

Since the launch of 50 ETF index option in February 2015, its trading volume keeps increasing year by year. This reflects the strong potential of the Chinese option market. As there were few English research on the 50 ETF option, I was very interested in applying the Black-Scholes (BS) and Merton Jump-Diffusion (MJD) models to exam their performance and find out which model is better. Three questions are set to achieve the purpose. Q1: How is the performance of the BS model? Q2: How is the performance of MJD model? Q3: Does MJD model perform better than BS model? The theories of both models are explained from very basic blocks and the empirical data is collected from a reliable source, the "Choice" Financial Terminal from Eastmoney. The relative error and line plot are used to exam the performance of both models. We find that both models perform well in the Chinese options market, but MJD model is slightly better than BS model