TY - CHAP
T1 - Direct exchange mechanisms for option pricing
AU - Abdullaev, Sarvar Abdullaev
AU - McBurney, Peter
AU - Musial-Gabrys, Katarzyna
PY - 2015
Y1 - 2015
N2 - This paper presents the design and simulation of direct exchange mechanisms for pricing European options. It extends McAfee's single-unit double auction to multi-unit format, and then applies it for pricing options through aggregating agent predictions of future asset prices. We will also propose the design of a combinatorial exchange for the simulation of agents using option trading strategies. We present several option trading strategies that are commonly used in real option markets to minimise the risk of future loss, and assume that agents can submit them as a combinatorial bid to the market maker. We provide simulation results for proposed mechanisms, and compare them with existing Black-Scholes model mostly used for option pricing. The simulation also tests the effect of supply and demand changes on option prices. It also takes into account agents with different implied volatility. We also observe how option prices are affected by the agents’ choices of option trading strategies.
AB - This paper presents the design and simulation of direct exchange mechanisms for pricing European options. It extends McAfee's single-unit double auction to multi-unit format, and then applies it for pricing options through aggregating agent predictions of future asset prices. We will also propose the design of a combinatorial exchange for the simulation of agents using option trading strategies. We present several option trading strategies that are commonly used in real option markets to minimise the risk of future loss, and assume that agents can submit them as a combinatorial bid to the market maker. We provide simulation results for proposed mechanisms, and compare them with existing Black-Scholes model mostly used for option pricing. The simulation also tests the effect of supply and demand changes on option prices. It also takes into account agents with different implied volatility. We also observe how option prices are affected by the agents’ choices of option trading strategies.
KW - Combinatorial exchanges
KW - Double auctions
KW - Mechanism design
KW - Option pricing
KW - Prediction markets
UR - http://www.scopus.com/inward/record.url?scp=84942750774&partnerID=8YFLogxK
U2 - 10.1007/978-3-319-17130-2_18
DO - 10.1007/978-3-319-17130-2_18
M3 - Conference paper
AN - SCOPUS:84942750774
SN - 9783319171296
VL - 8953
T3 - Lecture Notes in Computer Science (including subseries Lecture Notes in Artificial Intelligence and Lecture Notes in Bioinformatics)
SP - 269
EP - 284
BT - Lecture Notes in Computer Science (including subseries Lecture Notes in Artificial Intelligence and Lecture Notes in Bioinformatics)
PB - Springer-Verlag Berlin Heidelberg
T2 - 12th European Conference on Multi-Agent Systems, EUMAS 2014
Y2 - 18 December 2014 through 19 December 2014
ER -