Using Open Source Software to Investigate Put-Call Relationships of Shanghai Warrants

32 Pages Posted: 26 Feb 2007  

Joseph Chen-Yu Wang

Bitquant Research Laboratories

Date Written: February 23, 2007

Abstract

As China develops its derivatives and financial services industry it will be necessary for it to create an infrastructure for financial computing. Traditional proprietary models of software development may prove unsuitable as they treat the user of the software as a passive agent rather than as an equal partner. In this paper we describe an alternative approach to software development involving the creation of open source software in which software is treated as a service and in which free redistribution is encouraged.

To demonstrate the usefulness of open source software, we describe a project in which we have used open source software to investigate the put-call relationships of warrants on the Shanghai stock exchange. This project required substantial programming to create a development environment that combined a statistical language environment, R, with a derivatives valuation library, QuantLib. Using this software, we find a correspondence between the implied volatilities of put warrants and call warrants on the Shanghai Stock Exchange. Our working hypothesis is that we are seeing the results of a volatility "smile" which we believe is the result of the market pricing of large jumps in the price of the underlying. This suggests that simple models of warrant valuation such as the Black-Scholes model, may not be adequate for warrants on the SSE and that more sophisticated models are necessary.

Keywords: china, r, quantitative finance, open source software, quantlib

JEL Classification: C60, C63

Suggested Citation

Wang, Joseph Chen-Yu, Using Open Source Software to Investigate Put-Call Relationships of Shanghai Warrants (February 23, 2007). Available at SSRN: https://ssrn.com/abstract=965317 or http://dx.doi.org/10.2139/ssrn.965317

Joseph Chen-Yu Wang (Contact Author)

Bitquant Research Laboratories ( email )

3/F , Citicorp Centre
18 Whitfield Road
Tin Hau
Hong Kong

HOME PAGE: http://www.bitquant.com.hk/

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