A fuzzy set approach for generalized CRR model: An empirical analysis of S&P 500 index options

Cheng Few Lee, Gwo Hshiung Tzeng, Shin Yun Wang

Research output: Contribution to journalArticlepeer-review

24 Scopus citations

Abstract

This paper applies fuzzy set theory to the Cox, Ross and Rubinstein (CRR) model to set up the fuzzy binomial option pricing model (OPM). The model can provide reasonable ranges of option prices, which many investors can use it for arbitrage or hedge. Because of the CRR model can provide only theoretical reference values for a generalized CRR model in this article we use fuzzy volatility and fuzzy riskless interest rate to replace the corresponding crisp values. In the fuzzy binomial OPM, investors can correct their portfolio strategy according to the right and left value of triangular fuzzy number and they can interpret the optimal difference, according to their individual risk preferences. Finally, in this study an empirical analysis of S&P 500 index options is used to find that the fuzzy binomial OPM is much closer to the reality than the generalized CRR model.

Original languageEnglish (US)
Pages (from-to)255-275
Number of pages21
JournalReview of Quantitative Finance and Accounting
Volume25
Issue number3
DOIs
StatePublished - Nov 2005

All Science Journal Classification (ASJC) codes

  • Accounting
  • Business, Management and Accounting(all)
  • Finance

Keywords

  • A generalized CRR model
  • Fuzzy binomial OPM
  • fuzzy set theory
  • Option pricing model (OPM)
  • Portfolio strategy
  • Triangular fuzzy number

Fingerprint

Dive into the research topics of 'A fuzzy set approach for generalized CRR model: An empirical analysis of S&P 500 index options'. Together they form a unique fingerprint.

Cite this