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| Type | Master's Thesis |
| Scope | Discipline-based scholarship |
| Title | Pricing European Index Options using Expansion Based Methods |
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| Institution | University of Zurich |
| Faculty | Faculty of Business, Economics and Informatics |
| Number of Pages | 46 |
| Date | 2018 |
| Abstract Text | A new expansion method to acquire the risk-neutral probability measure from observed option prices is implemented (Necula et al., 2018). The closed formula to price European options is obtained by modifying the Gram-Charlier Type A series expansion through the "physicists" Hermite polynomials, known as the Gauss-Hermite expansion. Thanks to the modification, the expansion has convergence proprieties for fat-tailed distributions, usually analyzed in financial returns. The expansion coefficients can be calculated, e.g. from probability density function or characteristic function known in closed form, or calibrated from observed option prices. This thesis aims to contribute to the empirical studies about option pricing model based on expansion methods, adapted for the Dow Jones Index as underlying. After a calibration study in both simulated and real-word option prices, it is possible to conclude that the Gauss-Hermite expansion outperforms the other methods both in-sample and out-sample. |
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