Black-Scholes Versus Artificial Neural Networks in Pricing Ftse 100 Options

23 Pages Posted: 11 May 2004

See all articles by Julia A. Bennell

Julia A. Bennell

University of Southampton - School of Management

Charles Sutcliffe

University of Reading - ICMA Centre

Date Written: May 2003

Abstract

This paper compares the performance of Black-Scholes with an artificial neural network (ANN) in pricing European style call options on the FTSE 100 index. It is the first extensive study of the performance of ANNs in pricing UK options, and the first to allow for dividends in the closed-form model. For out-of-the-money options, the ANN is clearly superior to Black-Scholes. For in-the-money options, if the sample space is restricted by excluding deep in-the-money and long maturity options (3.4% of total volume), the performance of the ANN is comparable with that of Black-Scholes. The superiority of the ANN is a surprising result, given that European style equity options are the home ground of Black-Scholes, and suggests that ANNs may have an important role to play in pricing other options for which there is either no closed-form model, or the closed-form model is less successful than Black-Scholes for equity options.

Keywords: Black-Scholes, artificial neural networks, option pricing, FTSE 100 call options

JEL Classification: G13, C45

Suggested Citation

Bennell, Julia A. and Sutcliffe, Charles M., Black-Scholes Versus Artificial Neural Networks in Pricing Ftse 100 Options (May 2003). Available at SSRN: https://ssrn.com/abstract=544882 or http://dx.doi.org/10.2139/ssrn.544882

Julia A. Bennell

University of Southampton - School of Management ( email )

Highfield
Southampton S017 1BJ, Hampshire SO17 1BJ
United Kingdom

Charles M. Sutcliffe (Contact Author)

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

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