The most popular model for pricing options, both in financial literature as well as in practice has been the Black-Scholes model. In spite of its wide spread use the model appears to be deficient in pricing deep in the money and deep out of the money options using statistical estimates of...

We examine whether the dynamics of the implied volatility surface of individual equity options contains exploitable predictability patterns. Predictability in implied volatilities is expected due to the learning behavior of agents in option markets. In particular, we explore the possibility that...

This study compares the performances of neural network and Black-Scholes models in pricing BIST30 (Borsa Istanbul) index call and put options with different volatility forecasting approaches. Since the volatility is the key parameter in pricing options, GARCH (Generalized Autoregressive...

This paper explores the relationship of changes in the S&P 500 index implied volatility surface to economic state variables. Observable variables can explain some of the variation in implied volatility, with the majority of explanatory power from index returns. While the contemporaneous return...

We document widespread violations of stochastic dominance in the one-month S&P 500 index options market over the period 1986-2002. These violations imply that a trader can improve her expected utility by engaging in a zero-net-cost trade. We allow the market to be incomplete and also imperfect...

We propose an iterative method for pricing American options under jump-diffusion models. A finite difference discretization is performed on the partial integro-differential equation, and the American option pricing problem is formulated as a linear complementarity problem (LCP). Jump-diffusion...

The notion of model-free implied volatility (MFIV), constituting the basis for the highly publicized VIX volatility index, can be hard to measure with accuracy due to the lack of precise prices for options with strikes in the tails of the return distribution. This is reflected in practice as the...

Time dependent barrier options have barrier periods covering a portion of option life. This feature makes them hybrids of barrier options and ordinary European options. There are two types of time dependent barrier options: 1. front end barrier options; 2. rear end barrier options. The options...

We derive a new high-order compact finite difference scheme for option pricing in stochastic volatility models. The scheme is fourth order accurate in space and second order accurate in time. Under some restrictions, theoretical results like unconditional stability in the sense of von Neumann...