[R-SIG-Finance] modeling using the derivative or underlying

[Arun.stat]

Hi Stephen, I think it actually depends on the purpose of your analysis. If I
am into fair pricing and want to look the strength of deviation in the
traded price of some derivative as compared to that fair price then I would
go for modelling the underlying. Also for Risk management I would rather
model the underlying. However if my goal is just to understand the market
moves (hence prediction) for some derivative then I think directly modelling
those historical derivative prices would be better as in actual trading lot
of other noises generally involved in the traded price. However in this
approach you may occasionally find less data points especially near to the
inception of that derivative.

Best,


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