Performance Comparison of Option Pricing Models in Tehran Stock Exchange

Subject Areas : Stock Exchange

Sara Malekmohammadi ^{1 *} , Moslem Peymany Foroushany ² , Mostafa Sargolzaei ³

1 - Department of Finance and Banking, Faculty of Management and Accounting, University of Allameh Tabataba'i, Tehran, Iran
2 - Department of Finance and Banking, Faculty of Management and Accounting, Allameh Tabataba'i University, Tehran, Iran
3 - Department of Management and Accounting , University of Tabataba'i, Tehran, Iran

Received: 2024-08-07 Accepted : 2025-01-28 Published : 2025-06-22

Keywords: Black-Scholes, Heston Stochastic Volatility, Merton Jump Diffusion, Pricing, Options.,

Abstract :

     The aim of this study is to compare the performance of three commonly used option pricing models—namely the Black-Scholes model, the Heston stochastic volatility model, and the Merton jump-diffusion model—within the context of the Tehran Stock Exchange. For this purpose, a set of traded options was selected through a screening process based on specific liquidity and trading criteria. The parameters for each model were estimated using a forward rolling window method along with calibration and maximum likelihood estimation techniques. Then, option values were calculated for each model and compared to actual market prices to assess the models’ accuracy using the Root Mean Squared Error (RMSE) metric .The findings show that despite its simplicity, the Black-Scholes model outperformed the other two models in terms of quantitative accuracy. The difference in accuracy between Black-Scholes and Merton was statistically significant, while the difference between Black-Scholes and Heston was not statistically significant. Due to its ease of implementation, lower data requirements, and faster computational process, the Black-Scholes model is recommended for pricing options in Iran’s capital market. This study faced limitations such as limited market depth in the derivatives segment, restricted access to historical data, and the absence of a comprehensive centralized database for option contracts. Nevertheless, it is the first empirical study in Iran to assess the performance of these pricing models using real market data from the local derivatives market. The results of this research can be useful for individual and institutional investors, portfolio managers, financial analysts, and researchers interested in derivatives. Ultimately, the findings offer practical insights for selecting the most suitable pricing model and improving decision-making processes in the context of option valuation.

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