Analysis of the Performance of Modern Derivative Pricing Models in the Tehran Stock Exchange
Keywords:
Black–Scholes model, Heston model, Bi-Heston model, Binomial tree model, Trinomial tree modelAbstract
In the Iranian capital market, the Black–Scholes model is recognized as the principal framework for valuing option contracts; however, due to its assumptions of constant volatility and normally distributed underlying asset returns, it exhibits significant limitations under the highly inflationary and volatile conditions of the national economy. This study aims to analyze the performance of pricing models employed in the stock exchanges of Turkey, China, the United States, and Malaysia in comparison with the Black–Scholes pricing model (the valuation model used in the Iranian capital market), using call option data for four of the most actively traded stocks—Shasta, Iran Khodro, Khodro Saipa, and Ahram—during the year 2024. Model performance is evaluated based on the Mean Squared Error (MSE) and Mean Absolute Error (MAE) criteria. The empirical results indicate that more advanced models incorporating complex features such as stochastic volatility or discrete-time structures generally outperform the classical Black–Scholes model. Nevertheless, a one-way Analysis of Variance (ANOVA) conducted on the computed mean total errors demonstrates that there is no statistically significant difference among the best-performing models examined.
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Copyright (c) 2025 Mehrdad Miri (Author); Jalal Seifoddini; Reza Nemati Koshteli, Abdollah Rajabi Khanghah , Nader Naghshineh (Author)
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