Option Pricing Using Stochastic Interest Rate in Tehran Stock Exchange

Document Type : Original Article

Authors

1 Assistant Prof, Department of Finance and Banking, Allameh Tabataba'i University, Tehran, Iran

2 Assistant Prof., Department of Finance and Banking, Allameh Tabataba’i University, Tehran, Iran.

3 M.Sc. student in Financial Engineering and Risk Management, Allameh Tabataba'i University, Tehran, Iran

Abstract

The purpose of this paper is to investigate option pricing using stochastic interest rates and compare the performance of each of them with options pricing using non-stochastic interest rates (Black, Scholes and Merton model) in Tehran Stock Exchange. In this study, our data are option data traded in Tehran Stock Exchange from March 2018 to December 2022. During the research, the theoretical prices achieved from each model compared with the prices traded in the Tehran Stock Exchange. Based on the Root Mean Squared Error (RMSE) criterion and regression results, It was found that in the valuation of short-term options, there is not much difference between the option pricing using stochastic interest rate models and Black, Scholes and Merton model. While the pricing of long-term options have performed better than the Black, Scholes, and Merton models under stochastic interest rate. Also, using Vasicek interest rate model in option pricing is the most accurate option pricing result compared to other models. After that, Merton model and CIR model have been most accurate

Keywords

References

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Financial Management Perspective
Volume 13, Issue 41
2023
Pages 91-115

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