An inverse European option problem in estimating the time-dependent volatility function with statistical analysis

Hsi Mei Chen, Cheng Hung Huang

Research output: Contribution to journalArticlepeer-review

2 Citations (Scopus)

Abstract

An inverse algorithm with the Levenberg-Marquardt method is developed to estimate the time-dependent volatility function that was used in the model of financial analysis for European options from the observed value of option price. Numerical experiments for the inverse algorithm are performed to show the validity of the present study. Moreover, the statistical analysis is also considered here to determine the standard deviation and 99% confidence bounds for the estimated volatility function. Results show that the standard deviations of the estimated volatility function are decreased as the time approaches the expiry date. This implies that a more reliable volatility function can be obtained as time approaches the expiry date.

Original languageEnglish
Pages (from-to)103-111
Number of pages9
JournalInternational Journal of Systems Science
Volume36
Issue number2
DOIs
Publication statusPublished - 2005 Feb 10

All Science Journal Classification (ASJC) codes

  • Control and Systems Engineering
  • Theoretical Computer Science
  • Computer Science Applications

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