Pricing currency options with support vector regression and stochastic volatility model with jumps |
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| Authors: | Ping Wang |
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| Affiliation: | 1. Dipartimento di Matematica, Università degli Studi di Padova, Italy;2. Léonard de Vinci Pôle Universitaire, Research Center, Finance Group, Paris La Défense Cedex 92 916, France;3. University of Technology Sydney, Quantitative Finance Research Centre, Australia;4. African Institute of Financial Markets and Risk Management, University of Cape Town, South Africa;5. Faculty of Science, Department of Statistics, University of Johannesburg, P.O. Box 524, Auckland Park, 2006, South Africa |
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| Abstract: | This paper presents an efficient currency option pricing model based on support vector regression (SVR). This model focuses on selection of input variables of SVR. We apply stochastic volatility model with jumps to SVR in order to account for sudden big changes in exchange rate volatility. We use forward exchange rate as the input variable of SVR, since forward exchange rate takes interest rates of a basket of currencies into account. Therefore, the inputs of SVR will include moneyness (spot rate/strike price), forward exchange rate, volatility of the spot rate, domestic risk-free simple interest rate, and the time to maturity. Extensive experimental studies demonstrate the ability of new model to improve forecast accuracy. |
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