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Option Pricing With Modular Neural Networks


Gençay, Ramazan; Gradojevic, Nikola; Kukolj, Dragan (2009). Option Pricing With Modular Neural Networks. IEEE Transactions on Neural Networks, 20(4):626-637.

Abstract

This paper investigates a nonparametric modular neural network (MNN) model to price the S&P-500 European call options. The modules are based on time to maturity and moneyness of the options. The option price function of interest is homogeneous of degree one with respect to the underlying index price and the strike price. When compared to an array of parametric and nonparametric models, the MNN method consistently exerts superior out-of-sample pricing performance. We conclude that modularity improves the generalization properties of standard feedforward neural network option pricing models (with and without the homogeneity hint).

Abstract

This paper investigates a nonparametric modular neural network (MNN) model to price the S&P-500 European call options. The modules are based on time to maturity and moneyness of the options. The option price function of interest is homogeneous of degree one with respect to the underlying index price and the strike price. When compared to an array of parametric and nonparametric models, the MNN method consistently exerts superior out-of-sample pricing performance. We conclude that modularity improves the generalization properties of standard feedforward neural network option pricing models (with and without the homogeneity hint).

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Scopus Subject Areas:Physical Sciences > Software
Physical Sciences > Computer Science Applications
Physical Sciences > Computer Networks and Communications
Physical Sciences > Artificial Intelligence
Scope:Discipline-based scholarship (basic research)
Language:English
Date:April 2009
Deposited On:24 Aug 2023 13:14
Last Modified:29 Apr 2024 01:39
Publisher:Institute of Electrical and Electronics Engineers
ISSN:1045-9227
OA Status:Green
Publisher DOI:https://doi.org/10.1109/TNN.2008.2011130
Other Identification Number:merlin-id:5970
  • Content: Accepted Version
  • Language: English
  • Licence: Creative Commons: Attribution 4.0 International (CC BY 4.0)