Revealing the implied risk-neutral MGF from options: The wavelet method

Haven, Emmanuel; Liu, Xiaoquan; Ma, Chenghu; Shen, Li-Jiuan

doi:10.1016/j.jedc.2008.09.001

Cited by 16 publications

(15 citation statements)

References 37 publications

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“…According to the researches as far as pricing derivative securities is concerned, Wavelet based option pricing model is the latest option pricing model in the literature [6].…”

Section: Literature Reviewmentioning

confidence: 99%

“…The following are some of the applications of wavelet method in finance and economics as pointed out in [6] and [7]; Wavelets can be used in multi-scaling analysis. For example, analyzed the relationship between economic variables at different scale by using the wavelet method and they found out that over a different time horizon, the relationship changes [8].…”

Section: Literature Reviewmentioning

confidence: 99%

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Valuation of European Call Options Using Wavelet-Based Pricing Model and Black-Scholes Pricing Model

Chepkorir¹,

Waititu²,

Aduda³

2019

IJDSA

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The Black-Scholes model is a well-known model for hedging and pricing derivative securities. However, it exhibits some systematic biases or unrealistic assumptions like the log-normality of asset returns and constant volatility. A number of studies have attempted to reduce these biases in different ways. The objective of this study is to value a European call option using a non-parametric model and a parametric model. Amongst the non-parametric approaches used to improve the accuracy of the model in this study is the Wavelet-based pricing model. This model is found as promising alternative as far as pricing of European options is concerned, due to its varied volatility of the underlying security and estimation of the risk neutral MGF. This study made an attempt to improve the accuracy of option price estimation using Wavelet method and it improves the accuracy due to its ability to estimate the risk neutral MGF. The MSE and RMSE of Wavelet model is 0.208546 and 0.456669 respectively which is much lower than that of Black-Scholes model and therefore in conclusion, Wavelet model outperforms the other model. The study was carried out using simulated stock prices of 1024 observations.

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“…According to the researches as far as pricing derivative securities is concerned, Wavelet based option pricing model is the latest option pricing model in the literature [6].…”

Section: Literature Reviewmentioning

confidence: 99%

Section: Literature Reviewmentioning

confidence: 99%

Valuation of European Call Options Using Wavelet-Based Pricing Model and Black-Scholes Pricing Model

Chepkorir¹,

Waititu²,

Aduda³

2019

IJDSA

View full text Add to dashboard Cite

show abstract

“…Although the application of wave functions, when not sourced from quantum mechanics, have also found uses in social science, especially economics (see for example, Haven et al, 2009), our paper thus looks at wave functions as formalized via Fourier transforms and integrals which are intimately intertwined with the existence of the Heisenberg uncertainty principle. It is now our intention to introduce the 'wave number -density function'device which forms the cornerstone of basic quantum mechanics, in the context of arbitrage.…”

Section: Introductionmentioning

confidence: 99%

The use of action functionals within the quantum-like paradigm

Haven

Khrennikov

2017

Journal of Mathematical Psychology

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Arbitrage is a key concept in the theory of asset pricing and it plays a crucial role in …nancial decision making. The concept of the curvature of so called '…bre bundles' can be used to de…ne arbitrage. The concept of 'action'can play an important role in the de…nition of arbitrage. In this paper we connect the probabilities emerging from a (non) zero linear action with so called risk neutral probabilities. The paper also shows how arbitrage/non arbitrage can be well de…ned within a quantum-like paradigm. We also discuss brie ‡y the behavioral dimension of arbitrage and its coupling with the (ir)rationality of traders (and market participants) , as well as classical and quantum-like viewpoints on (ir)rationality.

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“…An increasing number of papers have recently appeared to invert Fourier transforms with wavelets, like [8] and [9] with coiflets wavelets and [10] with Mexican, Morlet, Poisson and Battle-Lemarié wavelets. In particular in the Financial Engineering context, [11] inverts a Laplace transform by means of B-splines wavelets of order 1.…”

Section: Introductionmentioning

confidence: 99%

Peaks and jumps reconstruction withB-splines scaling functions

Ortiz-Gracia¹,

Masdemont²

2014

Journal of Computational and Applied Mathematics

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We consider a methodology based in B-splines scaling functions to numerically invert Fourier or Laplace transforms of functions in the space L 2 (R). The original function is approximated by a finite combination of j th order B-splines basis functions and we provide analytical expressions for the recovered coefficients. The methodology is particularly well suited when the original function or its derivatives present peaks or jumps due to discontinuities in the domain. We will show in the numerical experiments the robustness and accuracy of the method. Date

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Revealing the implied risk-neutral MGF from options: The wavelet method

Cited by 16 publications

References 37 publications

Valuation of European Call Options Using Wavelet-Based Pricing Model and Black-Scholes Pricing Model

Valuation of European Call Options Using Wavelet-Based Pricing Model and Black-Scholes Pricing Model

The use of action functionals within the quantum-like paradigm

Peaks and jumps reconstruction withB-splines scaling functions

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