An Option Pricing Model That Combines Neural Network Approach and Black Scholes Formula

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Prof. S. K. Mitra
Prof. S. K. Mitra
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Dr. S. K.Mitra
Dr. S. K.Mitra
α Institute of Management Technology, Nagpur, India

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An Option Pricing Model That Combines Neural Network Approach and Black Scholes Formula

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Abstract

The Black & Scholes formula for theoretical pricing of options exhibits certain systematic biases, as observed prices in the market differs from the formula. A number of studies attempted to reduce these biases by incorporating a correction mechanism in the input data. Amongst non-parametric approaches used to improve accuracy of the model, Artificial Neural Networks are found as a promising alternative. The study made an attempt to improve accuracy of option price estimation using Artificial Neural Networks where all input parameters are adjusted by suitable multipliers. The values of these multipliers were determined using known data that minimises errors in valuation. The study was carried out using Nifty call option prices quoted on National Stock Exchange for the period 01-Jul 2008 to 30-Jun-11 covering three years.

References

18 Cites in Article
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Funding

No external funding was declared for this work.

Conflict of Interest

The authors declare no conflict of interest.

Ethical Approval

No ethics committee approval was required for this article type.

Data Availability

Not applicable for this article.

How to Cite This Article

Prof. S. K. Mitra. 1970. \u201cAn Option Pricing Model That Combines Neural Network Approach and Black Scholes Formula\u201d. Unknown Journal GJCST Volume 12 (GJCST Volume 12 Issue 4): .

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February 29, 2012

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en
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The Black & Scholes formula for theoretical pricing of options exhibits certain systematic biases, as observed prices in the market differs from the formula. A number of studies attempted to reduce these biases by incorporating a correction mechanism in the input data. Amongst non-parametric approaches used to improve accuracy of the model, Artificial Neural Networks are found as a promising alternative. The study made an attempt to improve accuracy of option price estimation using Artificial Neural Networks where all input parameters are adjusted by suitable multipliers. The values of these multipliers were determined using known data that minimises errors in valuation. The study was carried out using Nifty call option prices quoted on National Stock Exchange for the period 01-Jul 2008 to 30-Jun-11 covering three years.

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An Option Pricing Model That Combines Neural Network Approach and Black Scholes Formula

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