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GARCH Option Valuation: Theory and Evidence

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  • Peter Christoffersen

    ()
    (University of Toronto - Rotman School of Management and CREATES)

  • Kris Jacobs

    ()
    (University of Houston and Tilburg University)

  • Chayawat Ornthanalai

    (Georgia Institute of Technology)

Abstract

We survey the theory and empirical evidence on GARCH option valuation models. Our treatment includes the range of functional forms available for the volatility dynamic, multifactor models, nonnormal shock distributions as well as style of pricing kernels typically used. Various strategies for empirical implementation are laid out and we also discuss the links between GARCH and stochastic volatility models. In the appendix we provide Matlab computer code for option pricing via Monte Carlo simulation for nonaffine models as well as Fourier inversion for affine models.

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Bibliographic Info

Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2012-50.

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Length: 53
Date of creation: 08 May 2012
Date of revision:
Handle: RePEc:aah:create:2012-50

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Web page: http://www.econ.au.dk/afn/

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Keywords: GARCH; option valuation.;

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References

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Cited by:
  1. Kanniainen, Juho & Lin, Binghuan & Yang, Hanxue, 2014. "Estimating and using GARCH models with VIX data for option valuation," Journal of Banking & Finance, Elsevier, vol. 43(C), pages 200-211.

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