APPLICATION AND COMPARISON BETWEEN MERTON AND GARCH OPTION MODEL FOR BARRIER OPTION IN INDONESIA STOCK EXCHANGE

Abstract

The purpose of this research is to compare the accuracy of Merton Option Model and GARCH option models for Barrrier Option utilizing data from Astra, BCA, Indofood and Telkom at the Indonesian Stock Exchange. The intraday stock return of Astra, BCA, Indofood and Telkom exhibits an overwhelming presence of volatility clustering, suggesting that GARCH model has an effect which best corresponds with the actual price. The best model is constructed using ARIMA model and the best lag in GARCH model is extracted. The finding from this research show that by comparing the average percentage mean squared errors of the GARCH Option Model and the Merton Option Model , the former was found more accurate than the latter. GARCH Model relatively improves average percentage mean squared errors of Merton Model ; one month option shows fourty six point ninty six percent improvement, two month option shows fifty seventh point twenty two percent and three month option shows twenty three point twenty sevent percent.

Keywords

• Barrier Option, Derivative, GARCH Option Model, Merton Option Model , Stock Option Contract, Indonesian Stock Exchange.

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