Skip to main content
SpringerLink
Log in

Hybrid intelligent algorithm based option pricing method

  • Published:
Cluster Computing Aims and scope Submit manuscript

Abstract

This study investigates the relative rate of price discovery in Chinese Shanghai Stock Exchange (SSE) 50 spot index and SSE 50 ETF options, proposing a put–call parity (PCP) approach to recover the spot prices embedded in the options premiums. The PCP approach offers the benefits of reducing model risk and alleviating the burden of volatility estimation. Empirical results reveal that the contribution of SSE 50 ETF options to price discovery exceeds the contributions of SSE 50 index and SSE 50 ETF. However, ETF contributes larger price discovery than ETF options in the high volatility which is opposite from the leverage hypothesis.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Fig. 1

Similar content being viewed by others

References

  1. Ates, A., Wang, G.H.K.: Information transmission in electronic versus open-outcry trading systems: an analysis of US equity index futures markets. J. Futures Mark. 25(7), 679–715 (2005)

    Article  Google Scholar 

  2. Baillie, R.T., Booth, G.G., Tse, Y., et al.: Price discovery and common factor models. J. Financ. Mark. 5(3), 309–321 (2002)

    Article  Google Scholar 

  3. Booth, G.G., So, R.W., Tse, Y.: Price discovery in the German equity index derivatives markets. J. Futures Mark. 19(6), 619–643 (1999)

    Article  Google Scholar 

  4. Chan, K.: A further analysis of the lead–lag relationship between the cash market and stock index futures market. Rev. Financ. Stud. 5(1), 123–152 (1992)

    Article  MathSciNet  Google Scholar 

  5. Chan, L., Lien, D.: Are options redundant? Further evidence from currency futures markets. Int. Rev. Financ. Anal. 15(2), 179–188 (2006)

    Article  Google Scholar 

  6. Chen, W.P., Chung, H.: Has the introduction of S&P 500 ETF options led to improvements in price discovery of SPDRs? J. Futures Mark. 32(7), 683–711 (2012)

    Article  Google Scholar 

  7. Chen, Y.L., Gau, Y.F.: News announcements and price discovery in foreign exchange spot and futures markets. J. Bank. Finance 34(7), 1628–1636 (2010)

    Article  Google Scholar 

  8. Chu, Q.C., Hsieh, W.G., Tse, Y.: Price discovery on the S&P 500 index markets: an analysis of spot index, index futures, and SPDRs. Int. Rev. Financ. Anal. 8(1), 21–34 (1999)

    Article  Google Scholar 

  9. Chen, W.P., Chung, H., Lien, D.: Price discovery in the S&P 500 index derivatives markets. Int. Rev. Econ. Finance 45, 438–452 (2016)

    Article  Google Scholar 

  10. De Jong, F.: Measures of contributions to price discovery: a comparison. J. Financ. Mark. 5(3), 323–327 (2002)

    Article  Google Scholar 

  11. Fleming, J., Ostdiek, B., Whaley, R.E.: Trading costs and the relative rates of price discovery in stock, futures, and option markets. J. Futures Mark. 16(4), 353–387 (1996)

    Article  Google Scholar 

  12. Jong, F.D., Donders, M.W.M.: Intraday lead–lag relationships between the futures-, options and stock market. Rev. Finance 1(3), 337–359 (1998)

    Article  MATH  Google Scholar 

  13. Gonzalo, J., Granger, C.: Estimation of common long-memory components in cointegrated systems. J. Bus. Econ. Stat. 13(1), 27–35 (1995)

    MathSciNet  Google Scholar 

  14. Gonzalo, J., Ng, S.: A systematic framework for analyzing the dynamic effects of permanent and transitory shocks. J. Econ. Dyn. Control 25(10), 1527–1546 (2001)

    Article  MATH  Google Scholar 

  15. Hasbrouck, J.: One security, many markets: determining the contributions to price discovery. J. Finance 50(4), 1175–1199 (1995)

    Article  Google Scholar 

  16. Hasbrouck, J.: Intraday price formation in US equity index markets. J. Finance 58(6), 2375–2400 (2003)

    Article  Google Scholar 

  17. Holowczak, R., Simaan, Y.E., Wu, L.: Price discovery in the US stock and stock options markets: a portfolio approach. Rev. Deriv. Res. 2006 9(1), 37–65 (2003)

    Article  MATH  Google Scholar 

  18. Hsieh, W.L.G., Lee, C.S., Yuan, S.F.: Price discovery in the options markets: an application of put–call parity. J. Futures Mark. 28(4), 354–375 (2008)

    Article  Google Scholar 

  19. Huang, R.D.: The quality of ECN and Nasdaq market maker quotes. J. Finance 57(3), 1285–1319 (2002)

    Article  Google Scholar 

  20. Kamara, A., Miller, T.W.: Daily and intradaily tests of European put–call parity. J. Financ. Quant. Anal. 30(4), 519–539 (1995)

    Article  Google Scholar 

  21. Lien, D., Shrestha, K.: A new information share measure. J. Futures Mark. 29(4), 377–395 (2009)

    Article  Google Scholar 

  22. Rourke, T.: Price discovery in near- and away-from-the-money option markets. Financ. Rev. 48(1), 25–48 (2013)

    Article  Google Scholar 

  23. So, R.W., Tse, Y.: Price discovery in the Hang Seng index markets: index, futures, and the tracker fund. J. Futures Mark. 24(9), 887–907 (2004)

    Article  Google Scholar 

  24. Stock, J.H., Watson, M.W.: Testing for common trends. J. Am. Stat. Assoc. 83(404), 1097–1107 (1988)

    Article  MathSciNet  MATH  Google Scholar 

  25. Stoll, H.R., Whaley, R.E.: The dynamics of stock index and stock index futures returns. J. Financ. Quant. Anal. 25(4), 441–468 (1990)

    Article  Google Scholar 

  26. Tse, Y., Bandyopadhyay, P., Shen, Y.P.: Intraday price discovery in the DJIA index markets. J. Bus. Finance Account. 33(9–10), 1572–1585 (2006)

    Article  Google Scholar 

  27. Arunkumar, N., Ram Kumar, K., Venkataraman, V. Automatic detection of epileptic seizures using permutation entropy, Tsallis entropy and Kolmogorov complexity (2016) Journal of Medical Imaging and Health Informatics, 6 (2), pp. 526-531

  28. Arunkumar, N., Kumar, K.R., Venkataraman, V.: Automatic detection of epileptic seizures using new entropy measures. J. Med. Imaging Health Inform. 6(3), 724–730 (2016)

  29. Fernandes, S.L., Gurupur, V.P., Sunder, N.R., Arunkumar, N., Kadry, S.: A novel nonintrusive decision support approach for heart rate measurement. Pattern Recognit. Lett. (2017). https://doi.org/10.1016/j.patrec.2017.07.002

Download references

Acknowledgements

This research was supported by the Ministry of Education of Humanities and Social Science Project of China (Grant No. 16YJC790010), Social Science Fund of Chongqing, China (Grant No. 2016PY71).

Author information

Authors and Affiliations

  1. School of Economics, Southwest University of Political Science & Law, Chongqing, 401120, China

    Zhiying Chen, Dinghua Xu & Zhongyi Xiao

Authors
  1. Zhiying Chen
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Dinghua Xu
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Zhongyi Xiao
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Zhiying Chen.

Ethics declarations

Conflict of interests

The author declares that there is no conflict of interest regarding the publication of this paper.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Chen, Z., Xu, D. & Xiao, Z. Hybrid intelligent algorithm based option pricing method. Cluster Comput 22 (Suppl 2), 4785–4791 (2019). https://doi.org/10.1007/s10586-018-2383-9

Download citation

  • Received:

  • Revised:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10586-018-2383-9

Keywords

Search

Navigation