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| Type | Bachelor's Thesis |
| Scope | Discipline-based scholarship |
| Title | The performance of option pricing models during the Covid-19 crisis |
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| Institution | University of Zurich |
| Faculty | Faculty of Business, Economics and Informatics |
| Date | 2022 |
| Abstract Text | Classic option pricing models are known to perform moderately well in standard market conditions. However, if this is not given, their performance is greatly reduced. By divid- ing the Covid-19 crisis into three periods (pre-, mid-, and post-crisis), we measure the pricing error of four classic option pricing models (Black-Scholes-Merton model (1973), Cox-Ross-Rubinstein (binomial) model (1979), (crude) Monte Carlo Simulation (1977), and Heston model (1993)) in contrasting market situations. We first state an empirical proof of the Cox-Ross-Rubinstein model and Monte Carlo Simulation’s convergence to the Black-Scholes-Merton model as proclaimed by Cox, Ross, and Rubinstein (1979) and Boyle (1977). Then, we compare the performance of the Black-Scholes-Merton and Heston model, where the results show, with an agreement to preceding studies, that the former is significantly outperformed in both in-sample and out-of-sample testing. Both models display an increase in error in the mid-period, during which we observe high volatility and many out-of-the-money options. The Black-Scholes-Merton model overprices options in all periods, whereas the Heston model only shows a tendency of overvaluing during the mid-period. |
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