Publication details for Tahani Coolen-MaturiChen, J., Coolen, F.P.A. & Coolen-Maturi, T. (2019). On nonparametric predictive inference for asset and European option trading in the binomial tree model. Journal of the Operational Research Society 70(10): 1678-1691.
- Publication type: Journal Article
- ISSN/ISBN: 0160-5682, 1476-9360
- DOI: 10.1080/01605682.2019.1643682
- Further publication details on publisher web site
- Durham Research Online (DRO) - may include full text
Author(s) from Durham
This paper introduces a novel method for asset and option trading in a binomial scenario.
This method uses nonparametric predictive inference (NPI), a statistical methodology within im-
precise probability theory. Instead of inducing a single probability distribution from the existing
observations, the imprecise method used here induces a set of probability distributions. Based
on the induced imprecise probability, one could form a set of conservative trading strategies for
assets and options. By integrating NPI imprecise probability and expectation with the classical
nancial binomial tree model, two rational decision routes for asset trading and for European
option trading are suggested. The performances of these trading routes are investigated by com-
puter simulations. The simulation results indicate that the NPI based trading routes presented
in this paper have good predictive properties.