The Impact of Market Liquidity on the Effectiveness of Option Valuation with the Black-Scholes-Merton Model Using the Example of the WIG20 Index
The Black-Scholes-Merton model is one of the most popular option pricing models used in market practice. This model is based on unrealistic assumptions, including the lack of transaction costs. While it is not possible to satisfy all the conditions of the model, it is logical to assume that perfectl...
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| Language: | English |
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Wydawnictwo Uniwersytetu Ekonomicznego we Wrocławiu
2022-01-01
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| Series: | Nauki o Finansach |
| Online Access: | https://journals.ue.wroc.pl/fins/article/view/203 |
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| author | Michał Prymon |
| author_facet | Michał Prymon |
| author_sort | Michał Prymon |
| collection | DOAJ |
| description | The Black-Scholes-Merton model is one of the most popular option pricing models used in market practice. This model is based on unrealistic assumptions, including the lack of transaction costs. While it is not possible to satisfy all the conditions of the model, it is logical to assume that perfectly liquid markets will meet them better, which will help to reduce the risk of error. The aim of the article was to measure the impact of liquidity to the divergence of the Black-Scholes-Merton model compared to real market closing prices. The result of the research demonstrates a moderate dependence between the volume of the WIG20 index, the volume of option transactions and a negative correlation with the ILLIQ illiquidity indicator introduced by Amihud (2002). The research led to the conclusion that there is a positive correlation between the liquidity and the divergence between BSM model and the market prices.(original abstract) |
| format | Article |
| id | doaj-art-1b024ff4b10e47a9bc144a26b6b063d7 |
| institution | OA Journals |
| issn | 2449-9811 |
| language | English |
| publishDate | 2022-01-01 |
| publisher | Wydawnictwo Uniwersytetu Ekonomicznego we Wrocławiu |
| record_format | Article |
| series | Nauki o Finansach |
| spelling | doaj-art-1b024ff4b10e47a9bc144a26b6b063d72025-08-20T02:32:38ZengWydawnictwo Uniwersytetu Ekonomicznego we WrocławiuNauki o Finansach2449-98112022-01-01271204The Impact of Market Liquidity on the Effectiveness of Option Valuation with the Black-Scholes-Merton Model Using the Example of the WIG20 IndexMichał Prymon0Wroclaw University of Economics and BusinessThe Black-Scholes-Merton model is one of the most popular option pricing models used in market practice. This model is based on unrealistic assumptions, including the lack of transaction costs. While it is not possible to satisfy all the conditions of the model, it is logical to assume that perfectly liquid markets will meet them better, which will help to reduce the risk of error. The aim of the article was to measure the impact of liquidity to the divergence of the Black-Scholes-Merton model compared to real market closing prices. The result of the research demonstrates a moderate dependence between the volume of the WIG20 index, the volume of option transactions and a negative correlation with the ILLIQ illiquidity indicator introduced by Amihud (2002). The research led to the conclusion that there is a positive correlation between the liquidity and the divergence between BSM model and the market prices.(original abstract)https://journals.ue.wroc.pl/fins/article/view/203 |
| spellingShingle | Michał Prymon The Impact of Market Liquidity on the Effectiveness of Option Valuation with the Black-Scholes-Merton Model Using the Example of the WIG20 Index Nauki o Finansach |
| title | The Impact of Market Liquidity on the Effectiveness of Option Valuation with the Black-Scholes-Merton Model Using the Example of the WIG20 Index |
| title_full | The Impact of Market Liquidity on the Effectiveness of Option Valuation with the Black-Scholes-Merton Model Using the Example of the WIG20 Index |
| title_fullStr | The Impact of Market Liquidity on the Effectiveness of Option Valuation with the Black-Scholes-Merton Model Using the Example of the WIG20 Index |
| title_full_unstemmed | The Impact of Market Liquidity on the Effectiveness of Option Valuation with the Black-Scholes-Merton Model Using the Example of the WIG20 Index |
| title_short | The Impact of Market Liquidity on the Effectiveness of Option Valuation with the Black-Scholes-Merton Model Using the Example of the WIG20 Index |
| title_sort | impact of market liquidity on the effectiveness of option valuation with the black scholes merton model using the example of the wig20 index |
| url | https://journals.ue.wroc.pl/fins/article/view/203 |
| work_keys_str_mv | AT michałprymon theimpactofmarketliquidityontheeffectivenessofoptionvaluationwiththeblackscholesmertonmodelusingtheexampleofthewig20index AT michałprymon impactofmarketliquidityontheeffectivenessofoptionvaluationwiththeblackscholesmertonmodelusingtheexampleofthewig20index |