A1815
Title: An operational-subjective model of options arbitrage
Authors: Tyler Brough - Utah State University (United States) [presenting]
Janette Goodridge - Utah State University (United States)
Abstract: The purpose is to shine new light on the dynamic arbitrage strategy of the options market-maker by analyzing her decision problem from the operational-subjective Bayesian perspective of decision-making under uncertainty. The cutting-edge techniques of optimal hedged Monte Carlo (OHMC) and approximate Bayesian computation (ABC) are combined to implement the market-maker's dynamic trading model computationally. The entrepreneurial plan of the market-maker amounts is demonstrated as "chiselling" the posterior distribution of profits and losses. Empirical results of applying the methodology to the pricing and hedging of S&P 500 options are presented and are compared with standard methods.
