MODEL CONSTRUCTION OF OPTION PRICING BASED ON FUZZY THEORY

Authors

Shang-En Yu, Department of Hospitality Management, Taiwan Shoufu University, No. 168, Nanshi Li, Madou Dist., Tainan City 72153, Taiwan, R.O.C.
Ming-Yuan Leon Li, Departmentt Accountancy & Grad Inst Finance & Banking, National ChengKung University, No. 1, University Road, Tainan City 701, Taiwan, R.O.C.
Kun-Huang Huarng, Department of International Trade, Feng Chia University, Taichung 40724, Taiwan, R.O.C.
Tsung-Hao Chen, Department of Business Administration, Shu-Te University, Yen Chau, Kaohsiung 82445, Taiwan, R.O.C.
Chen-Yuan Chen, Department and Graduate School of Computer Science, National Pingtung University of Education, No. 4-18, Ming Shen Rd., Pingtung 90003, Taiwan, R.O.C. Doctoral Program in Management, National Kaohsiung First University of Science and Technology, 2 Jhuoyue Rd. Nanzih, Kaohsiung 811, Taiwan, R.O.C. Global Earth Observation and Data Analysis Center (GEODAC), National Cheng Kung University, No. 1, Ta-Hsueh Road, Tainan 701, Taiwan, R.O.C.Follow

Abstract

Option pricing is a tool that investors often use for the purpose of arbitrage or hedging. However, both the BlackScholes model and the CRR model can only provide a theoretical reference value. The volatility in the CRR model cannot always appear in the precise sense because the financial markets fluctuate from time to time. Hence, the fuzzy volatility is naturally to be considered. The main purpose of this paper is the application of fuzzy sets theory to the CRR model. It is expected that fuzzy volatility, instead of the crisp values conventionally used in the CRR model, can provide reasonable ranges and corresponding memberships for option prices, as a result of which, investors can interpret optimal value differently for different risk preferences. This paper shows a new method for option valuation using fuzzy set theory that is based on findings from earlier option valuation methods and from fuzzy membership function. In conclusion, the empirical evidence indicates the effectiveness of the proposed fuzzy model.

Recommended Citation

Yu, Shang-En; Li, Ming-Yuan Leon; Huarng, Kun-Huang; Chen, Tsung-Hao; and Chen, Chen-Yuan (2011) "MODEL CONSTRUCTION OF OPTION PRICING BASED ON FUZZY THEORY," Journal of Marine Science and Technology: Vol. 19: Iss. 5, Article 2.
DOI: 10.51400/2709-6998.2160
Available at: https://jmstt.ntou.edu.tw/journal/vol19/iss5/2