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| Type | Bachelor's Thesis |
| Scope | Discipline-based scholarship |
| Title | Black-Scholes vs. Heston: A comparative Analysis |
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| Institution | University of Zurich |
| Faculty | Faculty of Business, Economics and Informatics |
| Number of Pages | 59 |
| Date | 2019 |
| Abstract Text | This thesis investigates the option pricing performance of the Black-Scholes and Heston models. The Heston model assumes the underlying stock’s volatility to be stochastic rather than constant during the option contract’s life. Both models were tested using S&P 500 index call options. The Heston model first had to be calibrated using a non-linear optimization technique. The calibration process provided a quick solution, and the Heston model prices were calculated. The analysis indicates that the Heston model outperforms the Black-Scholes model. The Heston model can explain the implied volatility phenomena better. However, for short-lived, deep-in-the-money and deep-out-of-the money options, the Heston model is quite error prone. The pricing accuracy increases with the time to maturity. Nevertheless, one can conclude that stochastic volatility models are inevitable in option pricing and that the Black-Scholes model should only be used as a benchmark model. Models more sophisticated than the Heston model can provide even better results. |
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