Forecasting stock options prices via the solution of an ill-posed problem for the Black–Scholes equation. (1st November 2022)

• Record Type: Journal Article
• Authors: Klibanov, Michael V; Shananin, Aleksander A; Golubnichiy, Kirill V; Kravchenko, Sergey M
• Is Part Of: Inverse problems. Volume 38:Number 11(2022)
• Publication Date: 2022-11-01
• Subjects: Black–Scholes equation -- European call options -- geometric Brownian motion -- probability theory -- ill-posed problem -- quasi-reversibility method -- Carleman estimate; Inverse problems (Differential equations) -- Periodicals; 515.357
• DOI: 10.1088/1361-6420/ac91ec
• Languages: English
• ISSNs: 0266-5611

Abstract

Abstract: In the previous paper (2016 Inverse Problems 32 015010), a new heuristic mathematical model was proposed for accurate forecasting of prices of stock options for 1–2 trading days ahead of the present one. This new technique uses the Black–Scholes equation supplied by new intervals for the underlying stock and new initial and boundary conditions for option prices. The Black–Scholes equation was solved in the positive direction of the time variable, this ill-posed initial boundary value problem was solved by the so-called quasi-reversibility method (QRM). This approach with an added trading strategy was tested on the market data for 368 stock options and good forecasting results were demonstrated. In the current paper, we use the geometric Brownian motion to provide an explanation of that effectivity using computationally simulated data for European call options. We also provide a convergence analysis for QRM. The key tool of that analysis is a Carleman estimate.