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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27084
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| Title: | An Adaptive Evolutionary Approach to Option Pricing via Genetic Programming |
| Authors: | Chidambaran, N. K.
Lee, Chi-Wen Jevons
Trigueros, Joaguin R. |
| Issue Date: | Nov-1998 |
| Series/Report no.: | FIN-98-086 |
| Abstract: | We propose a methodology of Genetic Programming to approximate the
relationship between the option price, its contract terms and the
properties of the underlying stock price. An important advantage of the
Genetic Programming approach is that we can incorporate currently known
formulas, such as the Black-Scholes model, in the search for the best
approximation to the true pricing formula. Using Monte Carlo
simulations, we show that the Genetic Programming model approximates the
true solution better than the Black-Scholes model when stock prices
folow a jump-diffusion process. We also show that the Genetic
Programming model outperforms various other models in many different
settings. Other advantages of the Genetic Programming approach include
its robustness to changing environment, its low demand for data, and its
computational speed. Since genetic programs are flexible, self-learning
and sefl-improving, they are an ideal tool for practitioners. |
| URI: | http://hdl.handle.net/2451/27084 |
| Appears in Collections: | Finance Working Papers
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