University of Twente Student Theses


Comparison between traditional and modern option pricing models

Tudor, A. (2022) Comparison between traditional and modern option pricing models.

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Abstract:Today's financial markets include incredibly sophisticated mechanisms and offer a large spectrum of financial instruments. Retail investors could previously only invest in simpler products such as equities or bonds. Nowadays, derivatives are available to the general public. The lack of education made some of these financial products shift from their original aim to speculative investments since they can provide a lot of leverage. In this research paper, we want to take a deeper look into options, one of the most commonly traded derivatives, and make a comparison between the well-known option pricing models, such as the Black-Scholes or the Binomial model, to the AI-driven pricing models that are on the horizon. The quantitative comparison of the models will be the basis of the thesis research. We intend to do so by coding a Python tool that can retrieve the required data and compute option prices using the Black-Scholes and Binomial models. Then we will have to conduct a literature study to find pre-computed option prices using the AI-driven models. The final step will be to assess how close each estimate came to the actual market price of the option and draw the results to the research question.
Item Type:Essay (Bachelor)
Faculty:EEMCS: Electrical Engineering, Mathematics and Computer Science
Programme:Business & IT BSc (56066)
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