Purpose- This study aims to illustrate the efficiency of pure jump processes, more specifically Variance Gamma (VG) and Normal Inverse Gaussian models (NIG), in option pricing by comparing with the Black Scholes (BS) option pricing model for emerging markets.
Methodology- This study presents an alternative derivation of option pricing formulas for VG and NIG models. Then, it investigates the VG and NIG models' option pricing performance with the help of new derivation by comparing them with the BS option pricing model for emerging markets for an emerging country, Turkey. The data consists of the BIST30 index daily price and European options written on this index extend from 05 May 2018 to 05 May 2020 for given exercise prices with a maturity of 90 days. In this period, the European call options' strike prices range from 1200 to 1650, and the European put options' strike prices range from 1000 to 1400. To compare the models' efficiency, first, we calibrate the models by minimizing the sum of squared deviations between the observed and theoretical option prices. Second, we compute the option prices and compare the results with the observed option prices.
Findings- The significant contribution to the literature is the calibration of the pure jump processes (VG and NIG processes) using the characteristic functions, the continuous BS prices for an emerging market, and the computation of European options prices in BIST. We find that while the NIG process performs better than VG and BS models, the BS model is the worst in option pricing.
Conclusion- The pure jump processes (VG and NIG processes) can be calibrated using the characteristic functions, and option price estimations with them are better than the continuous BS prices for an emerging market. Thus, the pure jump processes are more efficient in market modeling than the BS model.
|Economics, Finance, Business Administration
|December 31, 2022
|Published in Issue
|Year 2022 Volume: 11 Issue: 4
Journal of Business, Economics and Finance (JBEF) is a scientific, academic, double blind peer-reviewed, quarterly and open-access journal. The publication language is English. The journal publishes four issues a year. The issuing months are March, June, September and December. The journal aims to provide a research source for all practitioners, policy makers and researchers working in the areas of business, economics and finance. The Editor of JBEF invites all manuscripts that that cover theoretical and/or applied researches on topics related to the interest areas of the Journal. JBEF charges no submission or publication fee.
Policy - JBEF applies the standards of
Committee on Publication Ethics (COPE). JBEF is committed to the academic
community ensuring ethics and quality of manuscripts in publications.
Plagiarism is strictly forbidden and the manuscripts found to be plagiarized
will not be accepted or if published will be removed from the publication. Authors
must certify that their manuscripts are their original work. Plagiarism,
duplicate, data fabrication and redundant publications are forbidden. The
manuscripts are subject to plagiarism check by iThenticate or similar. All manuscript submissions must provide a similarity report (up to 15% excluding quotes, bibliography, abstract, method).
Open Access - All research articles published in PressAcademia Journals are fully open access; immediately freely available to read, download and share. Articles are published under the terms of a Creative Commons license which permits use, distribution and reproduction in any medium, provided the original work is properly cited. Open access is a property of individual works, not necessarily journals or publishers. Community standards, rather than copyright law, will continue to provide the mechanism for enforcement of proper attribution and responsible use of the published work, as they do now.