Advanced Search
MyIDEAS: Login

An Empirical Examination of the Variance-Gamma Model for Foreign Currency Options

Contents:

Author Info

  • Elton A. Daal

    (University of New Orleans)

  • Dilip B. Madan

    (University of Maryland)

Registered author(s):

    Abstract

    We apply the variance-gamma (VG) option-pricing model to currency options. The model is a pure infinite-activity jump model. We examine whether and to what extent this new model can improve the pricing quality for currency options over the existing modified Black-Scholes model and the Merton jump-diffusion (JD) model. We find that the VG model yields better out-of-sample pricing performance than the modified Black-Scholes model or the JD model. In addition, a cross-entropy analysis shows that the VG model is more consistent with the general criterion of utility maximization and optimal portfolio selection.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.journals.uchicago.edu/cgi-bin/resolve?JB780603
    File Function: main text
    Download Restriction: Access to the online full text or PDF requires a subscription.

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Business.

    Volume (Year): 78 (2005)
    Issue (Month): 6 (November)
    Pages: 2121-2152

    as in new window
    Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:6:p:2121-2152

    Contact details of provider:
    Web page: http://www.journals.uchicago.edu/JB/

    Related research

    Keywords:

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Ammann, Manuel & Buesser, Ralf, 2013. "Variance Risk Premiums in Foreign Exchange Markets," Working Papers on Finance 1304, University of St. Gallen, School of Finance.
    2. Oguzhan Cepni & Ahmet Goncu & Mehmet Oguz Karahan & Tolga Umut Kuzubas, 2013. "Goodness-of-fit of the Heston, Variance-Gamma and Normal-Inverse Gaussian Models," Working Papers 2013/16, Bogazici University, Department of Economics.
    3. Ahmet Göncü & Mehmet Oguz Karahan & Tolga Umut Kuzubas, 2013. "Fitting the Variance-Gamma Model: A Goodness-of-Fit Check for Emerging Markets," Bogazici Journal of Economics and Administrative Sciences, Bogazici University, Department of Economics, vol. 27(2), pages 1-10.
    4. Todorov, Viktor & Tauchen, George, 2010. "Activity signature functions for high-frequency data analysis," Journal of Econometrics, Elsevier, vol. 154(2), pages 125-138, February.
    5. Olesia Verchenko, 2011. "Testing option pricing models: complete and incomplete markets," Discussion Papers 38, Kyiv School of Economics.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:ucp:jnlbus:v:78:y:2005:i:6:p:2121-2152. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Journals Division).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.