A Note on Option Pricing with the Use of Discrete-Time Stochastic Volatility Processes
AbstractIn this paper we show that in the lognormal discrete-time stochastic volatility model with predictable conditional expected returns, the conditional expected value of the discounted payoff of a European call option is infinite. Our empirical illustration shows that the characteristics of the predictive distributions of the discounted payoffs, obtained using Monte Carlo methods, do not indicate directly that the expected discounted payoffs are infinite.
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Bibliographic InfoArticle provided by CEJEME in its journal Central European Journal of Economic Modelling and Econometrics.
Volume (Year): 1 (2009)
Issue (Month): 1 (March)
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Web page: http://cejeme.org/
option pricing; SV model; Bayesian forecasting;
Find related papers by JEL classification:
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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- Amin, Kaushik I & Ng, Victor K, 1993. " Option Valuation with Systematic Stochastic Volatility," Journal of Finance, American Finance Association, American Finance Association, vol. 48(3), pages 881-910, July.
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- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
- Mahieu, R.J. & Schotman, P.C., 1998.
"An empirical application of stochastic volatility models,"
Open Access publications from Tilburg University
urn:nbn:nl:ui:12-3131739, Tilburg University.
- Ronald J. Mahieu & Peter C. Schotman, 1998. "An empirical application of stochastic volatility models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 13(4), pages 333-360.
- Jiang, G.J. & Sluis, P.J. van der, 2000. "Index Option Pricing Models with Stochastic Volatility and Stochastic Interest Rates," Discussion Paper, Tilburg University, Center for Economic Research 2000-36, Tilburg University, Center for Economic Research.
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