The performance of Leland's option pricing models in the presence of transaction costs: evidence from the Australian index option market
This study examines the performance of a few option pricing models with transaction costs in valuing call options on S&P/ASX 200 index. The option pricing models of the original Leland model as well as its two variations are tested and contrasted with the Black-Scholes-Merton (BSM) model across...
| Main Authors: | , |
|---|---|
| Format: | Proceeding Paper |
| Language: | English |
| Published: |
2010
|
| Subjects: | |
| Online Access: | http://irep.iium.edu.my/11558/1/Beijing_conference_mimi.pdf |
| _version_ | 1825645255310966784 |
|---|---|
| author | Abdullah, Mimi Hafizah Li, Steven |
| author_facet | Abdullah, Mimi Hafizah Li, Steven |
| author_sort | Abdullah, Mimi Hafizah |
| collection | IIUM |
| description | This study examines the performance of a few option pricing models with transaction costs in valuing call options on S&P/ASX 200 index. The option pricing models of the original Leland model as well as its two variations are tested and contrasted with the Black-Scholes-Merton (BSM) model across moneyness and maturity. Our empirical results reveal that the two variations of the original Leland model appear to perform well in pricing call options except short-term out-of-the-money calls. The pricing performance of Leland models appears to improve as rebalance becomes more frequent (from quarterly to daily) except for short-term and medium-term out-of-the-money calls. Moreover, the prices generated from the Leland models are subject to fewer and weaker pricing biases than are the prices from the BSM model. Overall, this paper demonstrates that it is important to consider transaction costs in option pricing that may lead to a more effective pricing of call options. |
| first_indexed | 2024-03-05T22:44:59Z |
| format | Proceeding Paper |
| id | oai:generic.eprints.org:11558 |
| institution | International Islamic University Malaysia |
| language | English |
| last_indexed | 2024-03-05T22:44:59Z |
| publishDate | 2010 |
| record_format | dspace |
| spelling | oai:generic.eprints.org:115582016-07-18T23:42:55Z http://irep.iium.edu.my/11558/ The performance of Leland's option pricing models in the presence of transaction costs: evidence from the Australian index option market Abdullah, Mimi Hafizah Li, Steven QA Mathematics This study examines the performance of a few option pricing models with transaction costs in valuing call options on S&P/ASX 200 index. The option pricing models of the original Leland model as well as its two variations are tested and contrasted with the Black-Scholes-Merton (BSM) model across moneyness and maturity. Our empirical results reveal that the two variations of the original Leland model appear to perform well in pricing call options except short-term out-of-the-money calls. The pricing performance of Leland models appears to improve as rebalance becomes more frequent (from quarterly to daily) except for short-term and medium-term out-of-the-money calls. Moreover, the prices generated from the Leland models are subject to fewer and weaker pricing biases than are the prices from the BSM model. Overall, this paper demonstrates that it is important to consider transaction costs in option pricing that may lead to a more effective pricing of call options. 2010-07-23 Proceeding Paper NonPeerReviewed application/pdf en http://irep.iium.edu.my/11558/1/Beijing_conference_mimi.pdf Abdullah, Mimi Hafizah and Li, Steven (2010) The performance of Leland's option pricing models in the presence of transaction costs: evidence from the Australian index option market. In: The 18th Annual Conference on Pacific Basin Finance, Economics, Accounting and Management, 23-25 July 2010, Beijing, China. (Unpublished) |
| spellingShingle | QA Mathematics Abdullah, Mimi Hafizah Li, Steven The performance of Leland's option pricing models in the presence of transaction costs: evidence from the Australian index option market |
| title | The performance of Leland's option pricing models in the presence of transaction costs: evidence from the Australian index option market |
| title_full | The performance of Leland's option pricing models in the presence of transaction costs: evidence from the Australian index option market |
| title_fullStr | The performance of Leland's option pricing models in the presence of transaction costs: evidence from the Australian index option market |
| title_full_unstemmed | The performance of Leland's option pricing models in the presence of transaction costs: evidence from the Australian index option market |
| title_short | The performance of Leland's option pricing models in the presence of transaction costs: evidence from the Australian index option market |
| title_sort | performance of leland s option pricing models in the presence of transaction costs evidence from the australian index option market |
| topic | QA Mathematics |
| url | http://irep.iium.edu.my/11558/1/Beijing_conference_mimi.pdf |
| work_keys_str_mv | AT abdullahmimihafizah theperformanceoflelandsoptionpricingmodelsinthepresenceoftransactioncostsevidencefromtheaustralianindexoptionmarket AT listeven theperformanceoflelandsoptionpricingmodelsinthepresenceoftransactioncostsevidencefromtheaustralianindexoptionmarket AT abdullahmimihafizah performanceoflelandsoptionpricingmodelsinthepresenceoftransactioncostsevidencefromtheaustralianindexoptionmarket AT listeven performanceoflelandsoptionpricingmodelsinthepresenceoftransactioncostsevidencefromtheaustralianindexoptionmarket |