Proceedings of the 2025 7th International Conference on Economic Management and Cultural Industry (ICEMCI 2025)

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Enhancing S&P 500 Index Option Pricing with GARCH Model: A Study on AI-Induced Market Volatility

Authors
Junde Cheng1, *
1Faculty of Humanities and Social Sciences, University of Nottingham Ningbo China, Ningbo, 315154, China
*Corresponding author. Email: hmyjc14@Nottingham.eud.cn
Corresponding Author
Junde Cheng
Available Online 3 December 2025.
DOI
10.2991/978-94-6463-888-2_39How to use a DOI?
Keywords
Black-Scholes; GARCH model; option pricing; time-varying volatility; S&P 500
Abstract

This study examines the impact of AI-driven market volatility on the pricing of S&P 500 index options. The aim is to assess the limitations of the Black-Scholes (BS) model under AI-induced volatility and explore improvements by incorporating the GARCH model. Time-varying volatilities are estimated using historical data from January 1, 2023 to April 21, 2024 and GARCH (1,2) models which is proven to be the best model to estimate the options’ price of S&P500, then comparing option prices from standard BS and BS-GARCH models. This study finds that the GARCH model achieves the most significant improvement in pricing accuracy for call options with shorter maturities, 1-10 days. However, it performs poorly for put options, highlighting the limitations of GARCH models in capturing the volatility dynamics of the latter, especially for medium-term options. This finding suggests that during the high volatility market driven by AI’s development, the prediction of call price will be more accurate with BS-GARCH model, while there are still problems on the prediction of put price.

Copyright
© 2025 The Author(s)
Open Access
Open Access This chapter is licensed under the terms of the Creative Commons Attribution-NonCommercial 4.0 International License (http://creativecommons.org/licenses/by-nc/4.0/), which permits any noncommercial use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made.

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Volume Title
Proceedings of the 2025 7th International Conference on Economic Management and Cultural Industry (ICEMCI 2025)
Series
Advances in Economics, Business and Management Research
Publication Date
3 December 2025
ISBN
978-94-6463-888-2
ISSN
2352-5428
DOI
10.2991/978-94-6463-888-2_39How to use a DOI?
Copyright
© 2025 The Author(s)
Open Access
Open Access This chapter is licensed under the terms of the Creative Commons Attribution-NonCommercial 4.0 International License (http://creativecommons.org/licenses/by-nc/4.0/), which permits any noncommercial use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made.

Cite this article

risenwbib
TY  - CONF
AU  - Junde Cheng
PY  - 2025
DA  - 2025/12/03
TI  - Enhancing S&P 500 Index Option Pricing with GARCH Model: A Study on AI-Induced Market Volatility
BT  - Proceedings of the 2025 7th International Conference on Economic Management and Cultural Industry (ICEMCI 2025)
PB  - Atlantis Press
SP  - 394
EP  - 407
SN  - 2352-5428
UR  - https://doi.org/10.2991/978-94-6463-888-2_39
DO  - 10.2991/978-94-6463-888-2_39
ID  - Cheng2025
ER  -