DOI: 10.5176/2251-1938_ORS13.33

Authors: David Liu, Siyuan Huang

Abstract:

This paper provides a deep research on the pricing ability of the hybrid ANNs based upon the Hang Seng Index Option spanning the period from Nov, 2005 to Oct, 2011, during which time the 2008 financial crisis had developed. We compare the performances of a standard artificial neural network with two other hybrid networks integrated with Black-Scholes model and Corrado and Su model respectively.

Two conclusions can be drawn based upon our research: 1) A hybrid neural network trained by using the financial data retained from a booming period of a market cannot have good predicting performance for options for the period that undergoes a financial crisis (tumbling period in the market), therefore, it should be cautious for researchers/practitioners when carry out the predictions of option prices by using a hybrid ANN. 2) We observed that Hybrid ANNs performed slightly better than traditional ANNs for option prices in the course of the financial crisis except for predicting OTM option prices, while BS-ANN performed worst for OTM options for options with long term maturity.

Keywords: option pricing; hybrid artificial neural network; financial crisis; options

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