A Black-Scholes user's guide to the Bachelier model

A Black-Scholes user's guide to the Bachelier model

To cope with the negative oil futures price caused by the COVID-19 recession, global commodity futures exchanges switched the option model from Black-Scholes to Bachelier in April 2020. This study reviews the literature on Bachelier's pioneering option pricing model and summarizes the practical...

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Bibliographic Details
Main Authors: CHOI, Jaehyuk, KWAK, Minsuk, TEE, Chyng Wen, WANG, Yumeng
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2022
Subjects:
Bachelier model
Black-Scholes model
Displaced diffusion model
Normal model
Finance
Finance and Financial Management
Online Access:https://ink.library.smu.edu.sg/lkcsb_research/6869
https://ink.library.smu.edu.sg/context/lkcsb_research/article/7868/viewcontent/SSRN_id3828310.pdf
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Institution: Singapore Management University
Language: English
Description
Summary:To cope with the negative oil futures price caused by the COVID-19 recession, global commodity futures exchanges switched the option model from Black-Scholes to Bachelier in April 2020. This study reviews the literature on Bachelier's pioneering option pricing model and summarizes the practical results on volatility conversion, risk management, stochastic volatility, and barrier options pricing to facilitate the model transition. In particular, using the displaced Black-Scholes model as a model family with the Black-Scholes and Bachelier models as special cases, we not only connect the two models but also present a continuous spectrum of model choices.

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