IEEE Computer Society, NASA Goddard Space Flight Center A Large Scale Comparison of Option Pricing Models with Historical Market Data

A set of stock option pricing models are im-plemented on the Connection Machine-2 and the DECmpp-12000 to compare model prices and histor-ical market data. Improved models, which incorporate stochastic volatility with American call generally have smaller pricing errors than simpler models which are based on constant volatility and European call. In a re-nement of the comparison between model and market prices, a gure of merit based on the bid/ask spread in the market, and the use of optimization techniques for model parameter estimation, are evaluated. Opti-mization appears to hold great promise for improving the accuracy of existing pricing models, especially for stocks which are dicult to price with conventional models.