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Issue 5(1), October 2010 -- Paper Abstracts

Girard  (p. 9-22)

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JOURNAL OF ACCOUNTING AND FINANCE

Pricing Accuracy of Put-Option Valuation Models: Directional Bias Due to Risk Free Interest Rates

Author(s): Sang Woo Heo, Peter Cashel-Cordo, Jong C. Rhim, Jun Gyu Kang

Citation: Sang Woo Heo, Peter Cashel-Cordo, Jong C. Rhim, Jun Gyu Kang,(2017) "Pricing Accuracy of Put-Option Valuation Models: Directional Bias Due to Risk Free Interest Rates," Journal of Accounting and Finance, Vol. 17, Iss. 5, pp. 44-51

Article Type: Research paper

Publisher: North American Business Press

Abstract:

The classical Black-Scholes formula reveals systematic biases in valuation of option prices (Geske and Roll 1984 and reference therein). Heo et al. (2015) also found the existence of similar biases in fractional quadratic option pricing models. These observed pricing biases depend on moneyness, the time to maturity, and volatility of underlying assets. Recently, we have noticed that pricing bias is also seemingly influenced by interest rates. This study compares pricing accuracy across several put option models and investigates pricing biases caused by risk-free LIBOR using daily data of Yahoo put options traded in CBOE from February 2005 to February 2015.