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The Effects of Different Parameter Estimation Methods on Option Pricing (An Empirical Analysis)

ФИО студента: Ekaterina Krutogolova

Руководитель: Dmitriy Alexandrovich Kachalov

Кампус/факультет: International College of Economics and Finance

Программа: Double degree programme in Economics of the NRU HSE and the University of London (Bachelor)

Год защиты: 2016

The main idea of this study is to compare different calibration meth- ods for Heston (1993) model for option pricing and assess model’s prac- tical usage. Hence, with the use of the most actively traded European call options on the S&P 500 index, several calibration methods are per- formed. Four different loss functions are applied to estimate parameters of the model that fit market price. Performance of the models obtained by calibration in each case is compared with respect to minimization of the model risk. The analysis of how different parameter estimation methods affect the model performance is conducted. Keywords: option pricing, stochastic volatility, Heston model, cali- bration.

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