An Application of Bootstrapping in Option Pricing

Athens University of Economics and Business, MSL Working Paper

33 Pages Posted: 8 Feb 2005 Last revised: 2 Nov 2008

See all articles by George Dotsis

George Dotsis

National Kapodistrian University of Athens - Faculty of Economics; Essex Finance Centre, Essex Business School, University of Essex

Raphael N. Markellos

University of East Anglia (UEA) - Norwich Business School

Date Written: October 31, 2008

Abstract

This paper explores the use of statistical bootstrapping in inferring the finite-sample distribution of option prices when an estimate is used in place of the true but unknown variance. The procedure can be easily adapted to infer the distribution of many useful nonlinear estimators, such as hedge ratios, even in the absence of analytical option pricing formulas. In an empirical application using S&P 500 data, we study the distribution of European and American option prices and deltas using bootstrapping and compare the results to those given by large sample theory. We also explore behaviour of these distributions when we shift volatility levels, maturities, risk-free rates and dividend yields.

Keywords: Option Pricing, Bootstrapping, Asymptotic Theory, Estimation Risk, American Options

JEL Classification: G13, C14, C10

Suggested Citation

Dotsis, George and Markellos, Raphael N., An Application of Bootstrapping in Option Pricing (October 31, 2008). Athens University of Economics and Business, MSL Working Paper, Available at SSRN: https://ssrn.com/abstract=663801 or http://dx.doi.org/10.2139/ssrn.663801

George Dotsis (Contact Author)

National Kapodistrian University of Athens - Faculty of Economics ( email )

Greece

HOME PAGE: http://sites.google.com/site/gdotsis/

Essex Finance Centre, Essex Business School, University of Essex ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Raphael N. Markellos

University of East Anglia (UEA) - Norwich Business School ( email )

Norwich
NR4 7TJ
United Kingdom

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