## A Dynamic Hybrid Option Pricing Model by Genetic Algorithm and Black- Scholes Model

### BibTeX

@MISC{Chen_adynamic,

author = {Yi-chang Chen and Shan-lin Chang and Chia-chun Wu},

title = {A Dynamic Hybrid Option Pricing Model by Genetic Algorithm and Black- Scholes Model},

year = {}

}

### OpenURL

### Abstract

Abstract—Unlike this study focused extensively on trading behavior of option market, those researches were just taken their attention to model-driven option pricing. For example, Black-Scholes (B-S) model is one of the most famous option pricing models. However, the arguments of B-S model are previously mentioned by some pricing models reviewing. This paper following suggests the importance of the dynamic character for option pricing, which is also the reason why using the genetic algorithm (GA). Because of its natural selection and species evolution, this study proposed a hybrid model, the Genetic-BS model which combining GA and B-S to estimate the price more accurate. As for the final experiments, the result shows that the output estimated price with lower MAE value than the calculated price by either B-S model or its enhanced one, Gram-Charlier garch (G-C garch) model. Finally, this work would conclude that the Genetic-BS pricing model is exactly practical. Keywords—genetic algorithm, Genetic-BS, option pricing model. I.

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Citation Context ...e described as below: A. Black-Scholes model (B-S) “The stock price follows a random walk in continuous time with a variance rate proportional to the square of the stock price” (Black & Scholes 1973) =-=[1]-=-. That rule was just mentioned in the Black-Scholes (B-S) model, a celebrated option pricing model. In the B-S model, such as the following formula expressions, stock index (S), exercise price (K), ti... |

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Citation Context ...y, and hedge ratio are still indeed important to be referenced. Furthermore, a literature also pointed out the effectiveness approach which is the combination of genetic programming and the B-S model =-=[8]-=-. Owing to the application of dynamical adjusted method, the research tries to process a hybrid option pricing model which combines the genetic algorithm [6] and B-S model [3]. However, the following ... |

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