Option Pricing Using Bayes Filters
نویسنده
چکیده
When using Black-Scholes formula to price options, the key is the estimation of the stochastic return variance. In this paper we discuss an approach based on Bayes filters which combines the GARCH model and the implied volatilities. Empirical experiments demonstrate the better pricing accuracy of this approach. Furthermore, we show that we can re-estimate the parameters of the dynamics system using ExpectationMaximization algorithm.
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