GARCH option pricing under skew
AbstractThis article is an empirical study dedicated to the GARCH Option pricing model of Duan (1995) applied to the FTSE 100 European style options for various maturities. We analyze the validity of the model given its ability to price one-day ahead out-of-sample call options and also its ability to capture the empirical dynamic of the volatility skew. First, we get a severe mispricing for deep out-of-the-money and short term call options. Second, this model reveals a good ability to capture the change of regime in the implied volatility surface.
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Bibliographic InfoPaper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/2138.
Date of creation: Jun 2005
Date of revision:
Publication status: Published in ICFAI International Journal of Applied Economics, 2005, Vol. 4, no. 6. pp. 78-86.Length: 8 pages
GARCH model; Monte Carlo simulations; Implied Volatility; Volatility Smile;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
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