Mispricing in Option Pricing Models Versus Market Payoffs: An Efficiency-Based Performance Metric

Abstract

Choice of the performance metric is a crucial part of empirical assessment of option pricing model performance and benchmarking, mainly because the outcome is subject to change based on the metric. Usage of performance metrics in the empirical option pricing literature is examined and their agreement is assessed. We also propose new metrics based on market efficiency tests for more robust assessment and to eliminate the confusion of metric choice. We claim that efficiency metrics are the better choice if the objective is to evaluate option models with their financial outcome, not just price fitting.

Correlation Financial Option Pricing Model and Computer Simulation under a Stochastic Interest Rate

“…Experiments were conducted to evaluate the performance of the new model with experimental numerical simulations, and the final experimental results proved that the model performed better than other models [5]. Mollapourasl et al proposed a coupled nonlinear volatility and option pricing model, which produces a leverage effect, that is, stock volatility is (negatively) correlated with stock returns, which can be seen as a coupled nonlinear wave alternative pricing model for Black-Scholes options [6]. Parker proposed a European option pricing model using an advanced model (MOR) approach.…”