Are traders’ rules useful for pricing options? Evidence from intraday data

Abstract

This paper examines the pricing performance of option pricing models by using intraday data on KOSPI 200 index options. We consider the Black–Scholes model, the ad hoc Black–Scholes model (ie, traders’ rules), the stochastic volatility model and the stochastic volatility model with jumps. In contrast to the findings of Jackwerth and Rubinstein, Li and Pearson, and Kim, who used daily data, our results suggest that the best model for pricing options is the most complicated model, that is, the stochastic volatility model with jumps, followed by the stochastic volatility model. This indicates that, for intraday data, traders’ rules do not dominate mathematically sophisticated models, and complicated models can outperform simple traders’ rules or the Black–Scholes model.