A Pragmatical Option Pricing Method Combining Black-Scholes Formula, Time Series Analysis and Artificial Neural Network

Abstract

Although many theoretical methods were developed to price various derivatives, pricing deviation still remains very high. This paper provides a pragmatical option pricing method by combining skew ness and kurtosis adjusted Black-Scholes model of Corrado and Su, time series analysis and Artificial Neural Network (ANN). The empirical tests in FTSE 100 Index options show that pricing deviation calculated by adjusted Black-Scholes model is still high. After the model is modified by time series analysis and ANN methods, the pricing deviation is reduced, which is much smaller than the previous models. It is suggested that time series analysis and Artificial Neural Network methods can be used in the pragmatical work to make the pricing more fast and precise.