Binary particle swarm optimization for black-scholes option pricing

Authors:
Sangwook Lee;Jusang Lee;D. Shim;Moongu Jeon
Affiliations:
School of Information & Mechatronics, GIST, Gwangju, Republic of Korea;Consulting Division, Samsung SDS, Republic of Korea;Dept. of Traffic Engineering, Kwandong University, Gangrung-Si, Gangwon-Do, Republic of Korea;School of Information & Mechatronics, GIST, Gwangju, Republic of Korea
Venue:
KES'07/WIRN'07 Proceedings of the 11th international conference, KES 2007 and XVII Italian workshop on neural networks conference on Knowledge-based intelligent information and engineering systems: Part I
Year:
2007

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Abstract

The Black-Scholes option pricing (BS) model is a landmark in contingent claim theory and has been widely accepted in financial markets. However, it has a difficulty in the use of the model, because the volatility which is a nonlinear function of the other parameters must be estimated. The more accurately the volatility is estimated, the more accurate estimates of theoretical option prices will be. Thus, we propose a new model based on particle swarm optimization (PSO), which finds more precise theoretical values of options with estimates of the implied volatility than genetic algorithms (GAs).