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Discrete time option pricing with flexible volatility estimation

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Author Info
Christian M. Hafner (CORE, UniversitÊ catholique de Louvain, Louvain-la-Neuve, Belgium)
Wolfgang HÄrdle () (Institut fØr Statistik und ãkonometrie, Humboldt-UniversitÄt zu Berlin, Spandauer Str. 1, D-10178 Berlin, Germany)

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Abstract

By extending the GARCH option pricing model of Duan (1995) to more flexible volatility estimation it is shown that the prices of out-of-the-money options strongly depend on volatility features such as asymmetry. Results are provided for the properties of the stationary pricing distribution in the case of a threshold GARCH model. For a stock index series with a pronounced leverage effect, simulated threshold GARCH option prices are substantially closer to observed market prices than the Black/Scholes and simulated GARCH prices.

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Publisher Info
Article provided by Springer in its journal Finance and Stochastics.

Volume (Year): 4 (2000)
Issue (Month): 2 ()
Pages: 189-207
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Handle: RePEc:spr:finsto:v:4:y:2000:i:2:p:189-207

Note: received: August 1997; final version received: April 1999
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Web page: http://www.springerlink.com/content/101164/

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Related research
Keywords: Option pricing; volatility; GARCH; threshold GARCH; leverage effect;

Other versions of this item:

Find related papers by JEL classification:
C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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  1. Peter Christoffersen & Kris Jacobs, 2002. "Which Volatility Model for Option Valuation?," CIRANO Working Papers 2002s-33, CIRANO. [Downloadable!]
  2. C. Hafner & H. Herwartz, . "Option Pricing under Linear Autoregressive Dynamics, Heteroskedasticity, and Conditional Leptokurtosis," Sonderforschungsbereich 373 1999-58, Humboldt Universitaet Berlin.
    Other versions:
  3. Lars Stentoft, 2008. "American Option Pricing using GARCH models and the Normal Inverse Gaussian distribution," CREATES Research Papers 2008-41, School of Economics and Management, University of Aarhus. [Downloadable!]
    Other versions:
  4. Jin-Chuan Duan & Peter Ritchken & Zhiqiang Sun, 2006. "Jump starting GARCH: pricing and hedging options with jumps in returns and volatilities," Working Paper 0619, Federal Reserve Bank of Cleveland. [Downloadable!]
  5. M. Fengler & H. Herwartz, . "Multivariate Volatility Models," Sonderforschungsbereich 373 2001-74, Humboldt Universitaet Berlin.
  6. Ignacio Mauleon, Javier Perote, 2000. "Testing densities with financial data: an empirical comparison of the Edgeworth–Sargan density to the Student’s t," European Journal of Finance, Taylor and Francis Journals, vol. 6(2), pages 225-239, June. [Downloadable!] (restricted)
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