IS THE BLACK–SCHOLES MODEL GOOD ENOUGH FOR RETAIL INVESTORS IN CHINA?

  • Haoran Zhang Manhattan College

Abstract

This study answers a simple question for Chinese investors, especially Chinese retail investors: Is the Black–Scholes model good enough for them to make investment decisions? Using the absolute out-of-sample error as a measure of model efficiency, I find that the volume-weighted mean absolute out-of-sample error is 12.03% of the option premium and investors have to tolerate more than 1% absolute error in almost all subsample groups. The significant out-of-sample error indicates that using the Black–Scholes model solely in the decision-making process may have a negative impact on the investments’ performance.

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Published
2022-12-12
How to Cite
Zhang, H. (2022). IS THE BLACK–SCHOLES MODEL GOOD ENOUGH FOR RETAIL INVESTORS IN CHINA?. Applied Finance Letters, 11, 28 - 35. Retrieved from https://ojs.aut.ac.nz/applied-finance-letters/article/view/589
Section
Articles submitted to regular issue