The performance of Leland's option pricing models in the presence of transaction costs: evidence from the Australian index option market

The performance of Leland's option pricing models in the presence of transaction costs: evidence from the Australian index option market

This study examines the performance of a few option pricing models with transaction costs in valuing call options on S&P/ASX 200 index. The option pricing models of the original Leland model as well as its two variations are tested and contrasted with the Black-Scholes-Merton (BSM) model across...

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Main Authors: Abdullah, Mimi Hafizah, Li, Steven
Format: Conference or Workshop Item
Language:English
Published: 2010
Subjects:
QA Mathematics
Online Access:http://irep.iium.edu.my/11558/
http://irep.iium.edu.my/11558/1/Beijing_conference_mimi.pdf
id iium-11558
recordtype eprints
spelling iium-115582016-07-18T23:42:55Z http://irep.iium.edu.my/11558/ The performance of Leland's option pricing models in the presence of transaction costs: evidence from the Australian index option market Abdullah, Mimi Hafizah Li, Steven QA Mathematics This study examines the performance of a few option pricing models with transaction costs in valuing call options on S&P/ASX 200 index. The option pricing models of the original Leland model as well as its two variations are tested and contrasted with the Black-Scholes-Merton (BSM) model across moneyness and maturity. Our empirical results reveal that the two variations of the original Leland model appear to perform well in pricing call options except short-term out-of-the-money calls. The pricing performance of Leland models appears to improve as rebalance becomes more frequent (from quarterly to daily) except for short-term and medium-term out-of-the-money calls. Moreover, the prices generated from the Leland models are subject to fewer and weaker pricing biases than are the prices from the BSM model. Overall, this paper demonstrates that it is important to consider transaction costs in option pricing that may lead to a more effective pricing of call options. 2010-07-23 Conference or Workshop Item NonPeerReviewed application/pdf en http://irep.iium.edu.my/11558/1/Beijing_conference_mimi.pdf Abdullah, Mimi Hafizah and Li, Steven (2010) The performance of Leland's option pricing models in the presence of transaction costs: evidence from the Australian index option market. In: The 18th Annual Conference on Pacific Basin Finance, Economics, Accounting and Management, 23-25 July 2010, Beijing, China. (Unpublished)
repository_type Digital Repository
institution_category Local University
institution International Islamic University Malaysia
building IIUM Repository
collection Online Access
language English
topic QA Mathematics
spellingShingle QA Mathematics
Abdullah, Mimi Hafizah
Li, Steven
The performance of Leland's option pricing models in the presence of transaction costs: evidence from the Australian index option market
description This study examines the performance of a few option pricing models with transaction costs in valuing call options on S&P/ASX 200 index. The option pricing models of the original Leland model as well as its two variations are tested and contrasted with the Black-Scholes-Merton (BSM) model across moneyness and maturity. Our empirical results reveal that the two variations of the original Leland model appear to perform well in pricing call options except short-term out-of-the-money calls. The pricing performance of Leland models appears to improve as rebalance becomes more frequent (from quarterly to daily) except for short-term and medium-term out-of-the-money calls. Moreover, the prices generated from the Leland models are subject to fewer and weaker pricing biases than are the prices from the BSM model. Overall, this paper demonstrates that it is important to consider transaction costs in option pricing that may lead to a more effective pricing of call options.
format Conference or Workshop Item
author Abdullah, Mimi Hafizah
Li, Steven
author_facet Abdullah, Mimi Hafizah
Li, Steven
author_sort Abdullah, Mimi Hafizah
title The performance of Leland's option pricing models in the presence of transaction costs: evidence from the Australian index option market
title_short The performance of Leland's option pricing models in the presence of transaction costs: evidence from the Australian index option market
title_full The performance of Leland's option pricing models in the presence of transaction costs: evidence from the Australian index option market
title_fullStr The performance of Leland's option pricing models in the presence of transaction costs: evidence from the Australian index option market
title_full_unstemmed The performance of Leland's option pricing models in the presence of transaction costs: evidence from the Australian index option market
title_sort performance of leland's option pricing models in the presence of transaction costs: evidence from the australian index option market
publishDate 2010
url http://irep.iium.edu.my/11558/
http://irep.iium.edu.my/11558/1/Beijing_conference_mimi.pdf
first_indexed 2023-09-18T20:20:52Z
last_indexed 2023-09-18T20:20:52Z
_version_ 1777408097393836032

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