Option Pricing Model With Different Volatility Estimation Methods

From the beginning of the warrant market, it became the focus of the China capital market, of which prices have gone up and down sharply. Their market prices are far from the theory prices with Black-Scholes Model. This study has done a systematic research of China warrants' prices. We took 40 warrants which listed on China Shanghai Security Exchanged and Shenzhen Security Exchange from 2005 to 2008 and pricing them with modified Black-Scholes model and stochastic volatility model with different volatility estimation methods. In particular, this study examines the out-of-sample performance of pricing model and compares the model price to market price. Pricing biases related to irrational investors, non-perfect market mechanism and some strict assumptions. These empirical results indicate that the EWMA model and implied volatility perform best and the reason why there are significant errors between model prices and market prices are the some factors of our China capital markets. So it is not appropriate to use time-series model to pricing warrants now, but the BS model with EWMA volatility have better performance when used for pricing China warrants.