The simulation of option prices with application to LIFFE options on futures

George A. Christodoulakis; Stephen E. Satchell

The simulation of option prices with application to LIFFE options on futures

George A. Christodoulakis, Stephen E. Satchell

Accounting and Finance division

Research output: Contribution to journal › Article › peer-review

Abstract

We build a framework for modelling the deviation of observed option prices from the Black & Scholes prices. We use a flexible model for a density, a two sided switching Weibull, to capture the implied volatility. The model can be used to generate prices, it can take into account no-arbitrage bounds for option prices and is capable of generating such stylised facts as the smile effect. We apply this methodology to LIFFE options on German government bond futures.

Original language	English
Pages (from-to)	249-262
Number of pages	13
Journal	European Journal of Operational Research
Volume	114
Issue number	2
Publication status	Published - 16 Apr 1999

Keywords

Generalised gamma
Implied volatility
LIFFE
Options
Simulation
Smile effect
Weibull

Cite this

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title = "The simulation of option prices with application to LIFFE options on futures",

abstract = "We build a framework for modelling the deviation of observed option prices from the Black & Scholes prices. We use a flexible model for a density, a two sided switching Weibull, to capture the implied volatility. The model can be used to generate prices, it can take into account no-arbitrage bounds for option prices and is capable of generating such stylised facts as the smile effect. We apply this methodology to LIFFE options on German government bond futures.",

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T1 - The simulation of option prices with application to LIFFE options on futures

AU - Christodoulakis, George A.

AU - Satchell, Stephen E.

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N2 - We build a framework for modelling the deviation of observed option prices from the Black & Scholes prices. We use a flexible model for a density, a two sided switching Weibull, to capture the implied volatility. The model can be used to generate prices, it can take into account no-arbitrage bounds for option prices and is capable of generating such stylised facts as the smile effect. We apply this methodology to LIFFE options on German government bond futures.

AB - We build a framework for modelling the deviation of observed option prices from the Black & Scholes prices. We use a flexible model for a density, a two sided switching Weibull, to capture the implied volatility. The model can be used to generate prices, it can take into account no-arbitrage bounds for option prices and is capable of generating such stylised facts as the smile effect. We apply this methodology to LIFFE options on German government bond futures.

KW - Generalised gamma

KW - Implied volatility

KW - LIFFE

KW - Options

KW - Simulation

KW - Smile effect

KW - Weibull

M3 - Article

SN - 0377-2217

VL - 114

SP - 249

EP - 262

JO - European Journal of Operational Research

JF - European Journal of Operational Research

IS - 2

ER -

The simulation of option prices with application to LIFFE options on futures

Abstract

Keywords

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