Hedging under the influence of transaction costs: An empirical investigation on FTSE 100 index options

Gregoriou, Andros, Healy, Jerome and Ioannidis, Christos (2007) Hedging under the influence of transaction costs: An empirical investigation on FTSE 100 index options. Journal of Futures Markets, 27 (5). pp. 471-494. ISSN 0270-7314

Full text not available from this repository.

Abstract

The Black–Scholes (BS; F. Black & M. Scholes, 1973) option pricing model, and modern parametric option pricing models in general, assume that a single unique price for the underlying instrument exists, and that it is the mid- (the average of the ask and the bid) price. In this article the authors consider the Financial Times and London Stock Exchange (FTSE) 100 Index Options for the time period 1992–1997. They estimate the ask and bid prices for the index, and show that, when substituted for the mid-price in the BS formula, they provide superior option price predictors, for call and put options, respectively. This result is reinforced further when they .t a non-parametric neural network model to market prices of liquid options. The empirical .ndings in this article suggest that the ask and bid prices of the underlying asset provide a superior fit to the mid/closing price because they include market maker's, compensation for providing liquidity in the market for constituent stocks of the FTSE 100 index.

Item Type:	Article
Faculty \ School:	Faculty of Social Sciences > Norwich Business School
Depositing User:	Vishal Gautam
Date Deposited:	01 Mar 2007
Last Modified:	01 Feb 2023 11:30
URI:	https://ueaeprints.uea.ac.uk/id/eprint/16321
DOI:	10.1002/fut.20257

Actions (login required)

View Item