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|Title: ||Monte Carlo Pricing of Derivative Securities and Uncertainty in Volatility Estimation|
|Authors: ||Joplin, George A.|
|Keywords: ||Honors papers|
|Date Issued: ||6-May-2011|
|Publisher: ||Memphis, Tenn. : Rhodes College|
|Abstract: ||In the standard time-inhomogeneous di usion model, estimation of the volatility function is far more important for Monte Carlo pricing than estimation of the drift function (due to a standard application of Girsanov's Theorem). As such, we study the distribution of option prices under the uncertainty of volatility function estimation. First, we run Monte Carlo simulations to price a variety of options using a xed estimate of the volatility function. Then, we run Monte Carlo simulations to price a variety of options using a bootstrapped re-estimation of volatility function in each Monte Carlo trial. The di erences in the resulting distributions of option prices may have implications for thinking about the bid-ask spread on an option price, and can be compared to historical data to gain a more complete perspective on the acceptability of various American-style option prices.
Description: George Joplin granted permission for the digitization of this paper. It was submitted by CD.|
|Description: ||George A. Joplin granted permission for his paper to be published in DLynx. He submitted at PDF copy of his paper.|
|Appears in Collections:||Mathematics and Computer Science. Honors Papers|
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