NPAC Technical Report SCCS-260
A Large Scale Comparison of Option Pricing Models with Historical Market Data.
Kim Mills, Michael Vinson, Gang Cheng, Thomas Finucane
Submitted March 01 1992
Abstract
A set of stock option pricing models are implemented on the Connection
Machine-2 and the DECmpp-12000 to compare model prices and historical market
data. Improved models, which incorporate stochastic volatility with American
call generally have smaller pricing errors than simpler models which are
based on constant volatility and European call. In a refinement of the
comparison between model and market prices, a figure of merit based on the
bid/ask spread in the market, and the use of optimization techniques for model
parameter estimation, are evaluated. Optimization appears to hold great
promise for improving the accuracy of existing pricing models, especially for
stocks which are difficult to price with conventional models.