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Pricing currency options in the presence of time-varying volatility and non-normalities

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  • Lim, G.C.
  • Martin, G.M.
  • Martin, V.L.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Multinational Financial Management.

Volume (Year): 16 (2006)
Issue (Month): 3 (July)
Pages: 291-314

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Handle: RePEc:eee:mulfin:v:16:y:2006:i:3:p:291-314

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Web page: http://www.elsevier.com/locate/mulfin

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References

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  1. Melino, Angelo & Turnbull, Stuart M., 1990. "Pricing foreign currency options with stochastic volatility," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 239-265.
  2. Bai, Xuezheng & Russell, Jeffrey R. & Tiao, George C., 2003. "Kurtosis of GARCH and stochastic volatility models with non-normal innovations," Journal of Econometrics, Elsevier, vol. 114(2), pages 349-360, June.
  3. Bernard Dumas & Jeff Fleming & Robert E. Whaley, 1998. "Implied Volatility Functions: Empirical Tests," Journal of Finance, American Finance Association, vol. 53(6), pages 2059-2106, December.
  4. Capelle-Blancard, Gunther & Jurczenko, Emmanuel & Maillet, Bertrand, 2001. "The approximate option pricing model: performances and dynamic properties," Journal of Multinational Financial Management, Elsevier, vol. 11(4-5), pages 427-443, December.
  5. Gurdip Bakshi & Nikunj Kapadia & Dilip Madan, 2003. "Stock Return Characteristics, Skew Laws, and the Differential Pricing of Individual Equity Options," Review of Financial Studies, Society for Financial Studies, vol. 16(1), pages 101-143.
  6. Lim, G. C. & Lye, J. N. & Martin, G. M. & Martin*, V. L., 1998. "The distribution of exchange rate returns and the pricing of currency options," Journal of International Economics, Elsevier, vol. 45(2), pages 351-368, August.
  7. De Vries, C.G. & Leuven, K.U., 1994. "Stylized Facts of Nominal Exchange Rate Returns," Papers 94-002, Purdue University, Krannert School of Management - Center for International Business Education and Research (CIBER).
  8. Lehar, Alfred & Scheicher, Martin & Schittenkopf, Christian, 2002. "GARCH vs. stochastic volatility: Option pricing and risk management," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 323-345, March.
  9. Rosenberg, Joshua V., 1998. "Pricing multivariate contingent claims using estimated risk-neutral density functions," Journal of International Money and Finance, Elsevier, vol. 17(2), pages 229-247, April.
  10. G.C. Lim & G.M. Martin & V.L. Martin, 2002. "Parametric Pricing of Higher Order Moments in S&P500 Options," Monash Econometrics and Business Statistics Working Papers 1/02, Monash University, Department of Econometrics and Business Statistics.
  11. Hafner, Christian M. & Herwartz, Helmut, 1999. "Option pricing under linear autoregressive dynamics, heteroskedasticity, and conditional leptokurtosis," SFB 373 Discussion Papers 1999,58, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  12. Chernov, Mikhail & Ronald Gallant, A. & Ghysels, Eric & Tauchen, George, 2003. "Alternative models for stock price dynamics," Journal of Econometrics, Elsevier, vol. 116(1-2), pages 225-257.
  13. Yacine Ait-Sahalia, 2001. "Telling from Discrete Data Whether the Underlying Continuous-Time Model is a Diffusion," NBER Working Papers 8504, National Bureau of Economic Research, Inc.
  14. Bakshi, Gurdip & Cao, Charles & Chen, Zhiwu, 1997. " Empirical Performance of Alternative Option Pricing Models," Journal of Finance, American Finance Association, vol. 52(5), pages 2003-49, December.
  15. Garman, Mark B. & Kohlhagen, Steven W., 1983. "Foreign currency option values," Journal of International Money and Finance, Elsevier, vol. 2(3), pages 231-237, December.
  16. Kim, Minho & Kim, Minchoul, 2003. "Implied volatility dynamics in the foreign exchange markets," Journal of International Money and Finance, Elsevier, vol. 22(4), pages 511-528, August.
  17. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  18. Francis X. Diebold & Robert S. Mariano, 1994. "Comparing Predictive Accuracy," NBER Technical Working Papers 0169, National Bureau of Economic Research, Inc.
  19. Gael M. Martin & Catherine S. Forbes & Vance L. Martin, 2003. "Implicit Bayesian Inference Using Option Prices," Monash Econometrics and Business Statistics Working Papers 5/03, Monash University, Department of Econometrics and Business Statistics.
  20. Clément, E. & Gourieroux, Christian & Monfort, Alain, 1997. "Econometric specification of the risk neutral valuation model," CEPREMAP Working Papers (Couverture Orange) 9706, CEPREMAP.
  21. Jarrow, Robert & Rudd, Andrew, 1982. "Approximate option valuation for arbitrary stochastic processes," Journal of Financial Economics, Elsevier, vol. 10(3), pages 347-369, November.
  22. Bates, David S., 2000. "Post-'87 crash fears in the S&P 500 futures option market," Journal of Econometrics, Elsevier, vol. 94(1-2), pages 181-238.
  23. Jondeau, Eric & Rockinger, Michael, 2003. "Conditional volatility, skewness, and kurtosis: existence, persistence, and comovements," Journal of Economic Dynamics and Control, Elsevier, vol. 27(10), pages 1699-1737, August.
  24. Joshua V. Rosenberg & Robert F. Engle, 1997. "Option Hedging Using Empirical Pricing Kernels," NBER Working Papers 6222, National Bureau of Economic Research, Inc.
  25. Bates, David S, 1996. "Jumps and Stochastic Volatility: Exchange Rate Processes Implicit in Deutsche Mark Options," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 69-107.
  26. Jackwerth, Jens Carsten & Rubinstein, Mark, 1996. " Recovering Probability Distributions from Option Prices," Journal of Finance, American Finance Association, vol. 51(5), pages 1611-32, December.
  27. Guo, Dajiang, 1998. "The Risk Premium of Volatility Implicit in Currency Options," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(4), pages 498-507, October.
  28. Charles Quanwei Cao & Gurdip S. Bakshi & Zhiwu Chen, 1997. "Empirical Performance of Alternative Option Pricing Models," Yale School of Management Working Papers ysm65, Yale School of Management.
  29. Engle, Robert F. & Mustafa, Chowdhury, 1992. "Implied ARCH models from options prices," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 289-311.
  30. Bollen, Nicolas P. B & Rasiel, Emma, 2003. "The performance of alternative valuation models in the OTC currency options market," Journal of International Money and Finance, Elsevier, vol. 22(1), pages 33-64, February.
  31. Charles Quanwei Cao & Gurdip S. Bakshi & Zhiwu Chen, 1997. "Empirical Performance of Alternative Option Pricing Models," Yale School of Management Working Papers ysm54, Yale School of Management.
  32. Bollen, Nicolas P. B. & Gray, Stephen F. & Whaley, Robert E., 2000. "Regime switching in foreign exchange rates: Evidence from currency option prices," Journal of Econometrics, Elsevier, vol. 94(1-2), pages 239-276.
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Citations

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Cited by:
  1. Cassidy, Daniel T., 2011. "Describing n-day returns with Student’s t-distributions," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 390(15), pages 2794-2802.
  2. Xiao, Wei-Lin & Zhang, Wei-Guo & Zhang, Xi-Li & Wang, Ying-Luo, 2010. "Pricing currency options in a fractional Brownian motion with jumps," Economic Modelling, Elsevier, vol. 27(5), pages 935-942, September.
  3. Sun, Lin, 2013. "Pricing currency options in the mixed fractional Brownian motion," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(16), pages 3441-3458.
  4. Cassidy, Daniel T. & Hamp, Michael J. & Ouyed, Rachid, 2010. "Pricing European options with a log Student’s t-distribution: A Gosset formula," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(24), pages 5736-5748.

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