Research On Option Pricing Under Liquidity Adjustment

As an important tool for hedging,arbitrage,speculation and price discovery,options play an important role in finance and risk aversion.In 1973,Chicago Board Options Exchange(CBOE)was established to provide a formal trading market for unified and standardized options contract trading,and options have entered a stage of rapid development.In recent years,China has firmly promoted the reform and opening up of the financial market and actively developed the financial derivatives market such as futures.In 2015,the SSE 50 ETF option entered the real trading stage under the impetus of the Shanghai Stock Exchange,which opened the curtain of China’s options trading.The Black-Scholes model is used as the benchmark pricing model for ordinary European options.One of the assumptions is that the underlying asset market has sufficient liquidity.However,the actual market liquidity level does not have sufficient liquidity as assumed by the model.The theoretical price of the option calculated by the Black-Scholes option pricing model is compared with the actual market price,and there is bound to be a pricing error.Therefore,it is of great theoretical and practical significance to study the impact of underlying asset liquidity on option pricing.This paper is divided into four parts.The first part briefly reviews the domestic and foreign scholars’ research on the Black-Scholes option pricing model and the related theoretical research on liquidity and option pricing models.The second part is mainly to construct the target asset liquidity index and construct the option pricing model that incorporates the liquidity parameter.The third part is empirical test and analysis,this part takes the S&P 500 index option in the US market and the Hang Seng index option in the Hong Kong market as the research sample,and empirically studies the pricing results of the option pricing model under the liquidity adjustment and the Black-Scholes option pricing model,The pricing performance(that is,the pricing error)of two option pricing models is compared by means of mean absolute error(MAE)and root mean square error(RMSE).The fourth part is a summary of conclusions and related recommendations,and has prospects for related research in the future.The empirical results of this paper show that there is a significant relationship between the underlying asset liquidity and the option pricing.Incorporating the underlying asset liquidity parameters into the Black-Scholes model,the pricing error of the model is smaller than the pricing error of the benchmark Black-Scholes model.The option pricing model under liquidity adjustment has higher pricing accuracy for the better liquidity of the S&P 500 index option,while for the option of the same underlying asset,the option pricing model under liquidity adjustment has higher pricing accuracy for the put option than the call option.Therefore,when pricing options,considering the underlying asset liquidity factors helps to increase the accuracy of model pricing.