Please use this identifier to cite or link to this item: http://hdl.handle.net/10267/9654
Title: Monte Carlo Pricing of Derivative Securities and Uncertainty in Volatility Estimation
Authors: Joplin, George A.
Keywords: Student research;Honors papers;Economics;Mathematics
Issue Date: 20-May-2011
Publisher: Memphis, Tenn. : Rhodes College
Abstract: In the standard time-in homogeneous 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.
URI: http://hdl.handle.net/10267/9654
Appears in Collections:Economics and Business Administration. Honors Papers

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