A Comparative Study On Pricing Methods Of The SSE 50ETF Option Based On Time-varying Volatility

The ETF have the advantages of open-ended funds and closed-end funds,which can diversify investment,reduce investment risks and transaction costs.Meanwhile it has the advantage of short selling as same as the common stock.On February 9,2015,the SSE 50 ETF option began to be listed and traded,and it opened the era of options trading in China's securities market.The ETF options have functions such as hedging,risk management and speculative arbitrage,which makes the China's capital market broader and deeper.Traditionally,the pricing of options is mainly based on the BSM model,but the BSM model cannot describe the time-varying volatility and explain the phenomenon of “volatility smile”,which leads to large errors in option pricing.The CEV model,IGARCH model and the Heston stochastic volatility model can overcome the disadvantages of the BSM model to some extent and reasonably explain volatility dynamics and volatility smiles.Based on it,this paper studies the pricing error between the real price and theoretical pricethe of the BSM model,the CEV model,the IGARCH model and the Heston model.The SSE 50 ETF option was selected as the research object,and the data of call options expiring in September 2018 were selected and screened.Meanwhile,the data were classified and statistically analyzed.On this basis,all parameters of the BSM model,the CEV model,the IGARCH model and the Heston model are estimated.Among them,the Heston model uses the adaptive simulated annealing algorithm to adjust the parameters of the model.After calculating the theoretical price of the option,it is compared with the market price according to different value intervals and expiration time.Then the accuracy of the above four pricing models is compared by error criteria of the mean relative error(MPE),mean absolute relative error(MAPE)and mean absolute error(MAE).It is found that no pricing model is always more accurate than other models although the overall performance of the IGARCH model and the Heston model is better than the BSM model and CEV model.So when calculating the option price,it should select the appropriate option pricing model according to the different maturity and value intervals of the option.The research results of this paper provide investors with more accurate option pricing models.With these methods,it is beneficial for 50 ETF options to play the role of price discovery and risk management in China's financial market.