An Optimization Approach for pricing of Discrete European Call options Based on the Preference of Investors
Firstly, a method for measuring the risk aversion of investors was proposed based on the prospect theory. Secondly, under a sole hypothetical condition in which the risk aversion degree for different assets is the same in a market, the pricing of discrete European options was given based on the obje...
| Main Authors: | , , , |
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| Format: | Article |
| Language: | English |
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Faculty of Mechanical Engineering in Slavonski Brod, Faculty of Electrical Engineering in Osijek, Faculty of Civil Engineering in Osijek
2023-01-01
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| Series: | Tehnički Vjesnik |
| Subjects: | |
| Online Access: | https://hrcak.srce.hr/file/433789 |
| _version_ | 1797206498119516160 |
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| author | Weiwei Wang Guoqing Gu Fameng Sun Xiaoping Hu |
| author_facet | Weiwei Wang Guoqing Gu Fameng Sun Xiaoping Hu |
| author_sort | Weiwei Wang |
| collection | DOAJ |
| description | Firstly, a method for measuring the risk aversion of investors was proposed based on the prospect theory. Secondly, under a sole hypothetical condition in which the risk aversion degree for different assets is the same in a market, the pricing of discrete European options was given based on the objective probability. Thirdly, it was proven that the European option price obtained was a non-arbitrate price. And then, both for the binomial tree, which is a complete market, and for the trinomial tree, which is an incomplete market, pricing European options were discussed by implementing the method provided in this paper. Lastly, an illustration is used to demonstrate how to estimate preference parameters from market data and how to calculate options prices. The result states that the method in this paper is the same as the traditional risk-neutral methods in a complete market, but it is different from the traditional risk-neutral methods in an incomplete market, and more, the price obtained in this paper is affected by the objective probability and also contains the risk attitude of the investors. |
| first_indexed | 2024-04-24T09:07:58Z |
| format | Article |
| id | doaj.art-28a4cc109ae34cc4909cc6fddee8efe3 |
| institution | Directory Open Access Journal |
| issn | 1330-3651 1848-6339 |
| language | English |
| last_indexed | 2024-04-24T09:07:58Z |
| publishDate | 2023-01-01 |
| publisher | Faculty of Mechanical Engineering in Slavonski Brod, Faculty of Electrical Engineering in Osijek, Faculty of Civil Engineering in Osijek |
| record_format | Article |
| series | Tehnički Vjesnik |
| spelling | doaj.art-28a4cc109ae34cc4909cc6fddee8efe32024-04-15T18:25:39ZengFaculty of Mechanical Engineering in Slavonski Brod, Faculty of Electrical Engineering in Osijek, Faculty of Civil Engineering in OsijekTehnički Vjesnik1330-36511848-63392023-01-0130376076410.17559/TV-20220609025146An Optimization Approach for pricing of Discrete European Call options Based on the Preference of InvestorsWeiwei Wang0Guoqing Gu1Fameng Sun2Xiaoping Hu3School of Applied Technology, Nanjing University of Information Science and Technology, Nanjing 210044, PR ChinaFinance Office, Jiangsu Open University, Nanjing 210036, PR ChinaSinopec Chemical Sales Co., Ltd. Jiangsu Branch, Nanjing 210002PR ChinaSchool of Economics and Management, Southeast University, Nanjing 210096PR ChinaFirstly, a method for measuring the risk aversion of investors was proposed based on the prospect theory. Secondly, under a sole hypothetical condition in which the risk aversion degree for different assets is the same in a market, the pricing of discrete European options was given based on the objective probability. Thirdly, it was proven that the European option price obtained was a non-arbitrate price. And then, both for the binomial tree, which is a complete market, and for the trinomial tree, which is an incomplete market, pricing European options were discussed by implementing the method provided in this paper. Lastly, an illustration is used to demonstrate how to estimate preference parameters from market data and how to calculate options prices. The result states that the method in this paper is the same as the traditional risk-neutral methods in a complete market, but it is different from the traditional risk-neutral methods in an incomplete market, and more, the price obtained in this paper is affected by the objective probability and also contains the risk attitude of the investors.https://hrcak.srce.hr/file/433789discrete European optionpricingrisk aversionobjective probability |
| spellingShingle | Weiwei Wang Guoqing Gu Fameng Sun Xiaoping Hu An Optimization Approach for pricing of Discrete European Call options Based on the Preference of Investors Tehnički Vjesnik discrete European option pricing risk aversion objective probability |
| title | An Optimization Approach for pricing of Discrete European Call options Based on the Preference of Investors |
| title_full | An Optimization Approach for pricing of Discrete European Call options Based on the Preference of Investors |
| title_fullStr | An Optimization Approach for pricing of Discrete European Call options Based on the Preference of Investors |
| title_full_unstemmed | An Optimization Approach for pricing of Discrete European Call options Based on the Preference of Investors |
| title_short | An Optimization Approach for pricing of Discrete European Call options Based on the Preference of Investors |
| title_sort | optimization approach for pricing of discrete european call options based on the preference of investors |
| topic | discrete European option pricing risk aversion objective probability |
| url | https://hrcak.srce.hr/file/433789 |
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