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Bayesian option pricing using asymmetric GARCH models

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  • Bauwens, Luc
  • Lubrano, Michel

Abstract

This paper shows how one can compute option prices from a Bayesian inference view point, using a GARCH model for the dynamics of the the volatility of the underlying asset. The proposed evaluation of an option is the predictive expectation of its payoff function. The predictive distribution of this function provides a natural metric, provided it is neutralised with respect to the risk, for gauging the predictive option price or other option evaluations. The proposed method is compared to the Black and Scholes evaluation, in which a marginal mean volatility is plugged, but which does not provide a natural metric. The methods are illustrated using symmetric, asymmetric and smooth transition GARCH models with data on a stock index in Brussels.
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(This abstract was borrowed from another version of this item.)

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  • Bauwens, Luc & Lubrano, Michel, 2002. "Bayesian option pricing using asymmetric GARCH models," Journal of Empirical Finance, Elsevier, vol. 9(3), pages 321-342, August.
    • Handle: RePEc:eee:empfin:v:9:y:2002:i:3:p:321-342
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    More about this item

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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