Option-implied adjusted volatility using modified generalised Leland Models: an empirical study on Dow Jones industrial average index options

Abdullah, Mimi Hafizah and Harun, Hanani Farhah (2020) Option-implied adjusted volatility using modified generalised Leland Models: an empirical study on Dow Jones industrial average index options. Malaysian Journal of Mathematical Sciences, 14 (S). pp. 93-105. ISSN 1823-8343 E-ISSN 2289-750X

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Abstract

This study investigates the relative option pricing performance of Modified Generalised Leland models. We employ non-parametric mechanism within the conventional option-pricing framework based on the Leland models to assure realistic pricing of options. This study extends the models by developing Modified Generalised Leland models based on the implied adjusted volatility introduced in Leland models. The proposed models are developed to incorporate the transaction costs rate in the integrated model-free framework. Relevant sample data extracted from the Dow Jones Industrial Average index options is tested in this study. We find that the option-implied adjusted volatility, which is priced using the Modified Generalised Leland models, delivers a significant improvement to the option valuation accuracy.

Item Type:	Article (Journal)
Uncontrolled Keywords:	Model-free modelling, options, transaction costs, volatility
Subjects:	Q Science > QA Mathematics
Kulliyyahs/Centres/Divisions/Institutes (Can select more than one option. Press CONTROL button):	Kulliyyah of Science > Department of Computational and Theoretical Sciences
Depositing User:	Ms Mimi Hafizah Abdullah
Date Deposited:	18 Oct 2021 16:55
Last Modified:	18 Oct 2021 16:56
URI:	http://irep.iium.edu.my/id/eprint/92798

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