TY - JOUR
T1 - Tradability, closeness to market prices, and expected profit
T2 - their measurement for a binomial model of options pricing in a heterogeneous market
AU - Shvimer, Yossi
AU - Herbon, Avi
N1 - Publisher Copyright:
© 2019, Springer-Verlag GmbH Germany, part of Springer Nature.
PY - 2020/7/1
Y1 - 2020/7/1
N2 - A reliable method of options pricing in real time would help various players, including hedgers and speculators, to make informed decisions. In this study, we develop an extensive simulation with multiple business environments, which includes the use of real data from the S&P 500 Index between the years 2010–2017 for the 30 days prior to expiration of the options. Forecasted tradability is computed based on the SH model: a theoretical model of real-time options pricing that takes into account players’ heterogeneity with regard to their willingness to accept offers proposed by the opposing player. The quality of the model is examined for the scenario in which the model players are speculators who act against the real market prices. We show that the equilibrium prices predicted by the SH model are close to the market prices (a deviation of up to approx. 3%) in an In-The-Money environment. Additionally, the tougher the players (i.e., the greater their level of unwillingness to accept a bid from the opposing player), the higher the average tradability. We also find that the level of willingness of the players has a greater effect on tradability than does option moneyness or the market trend.
AB - A reliable method of options pricing in real time would help various players, including hedgers and speculators, to make informed decisions. In this study, we develop an extensive simulation with multiple business environments, which includes the use of real data from the S&P 500 Index between the years 2010–2017 for the 30 days prior to expiration of the options. Forecasted tradability is computed based on the SH model: a theoretical model of real-time options pricing that takes into account players’ heterogeneity with regard to their willingness to accept offers proposed by the opposing player. The quality of the model is examined for the scenario in which the model players are speculators who act against the real market prices. We show that the equilibrium prices predicted by the SH model are close to the market prices (a deviation of up to approx. 3%) in an In-The-Money environment. Additionally, the tougher the players (i.e., the greater their level of unwillingness to accept a bid from the opposing player), the higher the average tradability. We also find that the level of willingness of the players has a greater effect on tradability than does option moneyness or the market trend.
KW - Binomial options
KW - Equilibrium model
KW - Forecasted tradability
KW - Heterogeneous players
UR - http://www.scopus.com/inward/record.url?scp=85070328014&partnerID=8YFLogxK
U2 - 10.1007/s11403-019-00259-0
DO - 10.1007/s11403-019-00259-0
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SN - 1860-711X
VL - 15
SP - 737
EP - 762
JO - Journal of Economic Interaction and Coordination
JF - Journal of Economic Interaction and Coordination
IS - 3
ER -