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Realizing smiles: Options pricing with realized volatility

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  • Corsi, Fulvio
  • Fusari, Nicola
  • La Vecchia, Davide

Abstract

We develop a discrete-time stochastic volatility option pricing model exploiting the information contained in the Realized Volatility (RV), which is used as a proxy of the unobservable log-return volatility. We model the RV dynamics by a simple and effective long-memory process, whose parameters can be easily estimated using historical data. Assuming an exponentially affine stochastic discount factor, we obtain a fully analytic change of measure. An empirical analysis of Standard and Poor's 500 index options illustrates that our model outperforms competing time-varying and stochastic volatility option pricing models.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 107 (2013)
Issue (Month): 2 ()
Pages: 284-304

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Handle: RePEc:eee:jfinec:v:107:y:2013:i:2:p:284-304

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Web page: http://www.elsevier.com/locate/inca/505576

Related research

Keywords: High-frequency; Realized volatility; Option pricing;

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Cited by:
  1. Diego Amaya & Peter Christoffersen & Kris Jacobs & Aurelio Vasquez, 2013. "Does Realized Skewness Predict the Cross-Section of Equity Returns?," CREATES Research Papers 2013-41, School of Economics and Management, University of Aarhus.
  2. Sévi, Benoît, 2014. "Forecasting the volatility of crude oil futures using intraday data," European Journal of Operational Research, Elsevier, vol. 235(3), pages 643-659.
  3. Audrino, Francesco & Fengler, Matthias, 2013. "Are classical option pricing models consistent with observed option second-order moments? Evidence from high-frequency data," Economics Working Paper Series 1311, University of St. Gallen, School of Economics and Political Science.

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