Mispricing in Option Pricing Models Versus Market Payoffs: An Efficiency‐Based Performance Metric. Issue 92 (21st November 2017)

• Record Type: Journal Article
• Authors: Orbay, Berk; Güllü, Refık; Hörmann, Wolfgang
• Is Part Of: Wilmott. Volume 2017:Issue 92(2017)
• Page Start: 44
• Page End: 57
• Publication Date: 2017-11-21
• Subjects: option pricing -- market efficiency -- pricing error; Finance -- Periodicals; Financial services industry -- Periodicals; 332
• DOI: 10.1002/wilm.10633
• Languages: English
• ISSNs: 1540-6962

Abstract

Abstract : Choice of the performance metric is a crucial part of empirical assessment of option pricing model performance and benchmarking, mainly because the outcome is subject to change based on the metric. Usage of performance metrics in the empirical option pricing literature is examined and their agreement is assessed. We also propose new metrics based on market efficiency tests for more robust assessment and to eliminate the confusion of metric choice. We claim that efficiency metrics are the better choice if the objective is to evaluate option models with their financial outcome, not just price fitting.