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Empirical Performance of Alternative Option Pricing Models

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Author Info
 Bakshi, Gurdip
Cao, Charles
Chen, Zhiwu
Abstract

Substantial progress has been made in developing more realistic option pricing models. Empirically, however, it is not known whether and by how much each generalization improves option pricing and hedging. The authors fill this gap by first deriving an option model that allows volatility, interest rates, and jumps to be stochastic. Using S&P 500 options, they examine several alternative models from three perspectives: (1) internal consistency of implied parameters/volatility with relevant time-series data, (2) out-of-sample pricing, and (3) hedging. Overall, incorporating stochastic volatility and jumps is important for pricing and internal consistency. But for hedging, modeling stochastic volatility alone yields the best performance. Copyright 1997 by American Finance Association.

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Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 52 (1997)
Issue (Month): 5 (December)
Pages: 2003-49
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Handle: RePEc:bla:jfinan:v:52:y:1997:i:5:p:2003-49

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