Short-term options with stochastic volatility: Estimation and empirical performance
AbstractThis paper examines the stochastic volatility model suggested by Heston (1993). We employ a time-series approach to estimate the model and we discuss the potential effects of time-varying skewness and kurtosis on the performance of the model. In particular, it is found that the model tends to overprice out-of-the-money calls and underprice in-the-money calls. It is also found that the daily volatility risk premium presents a quite volatile behavior over time; however, our evidence suggests that the volatility risk premium has a negligible impact on the pricing performance of HestonÂ´s model.
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- Ángel León & Gabriele Fiorentini & Gonzalo Rubio, 2000. "Short-Term Options With Stochastic Volatility: Estimation And Empirical Performance," Working Papers. Serie AD 2000-25, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
- NEP-ALL-1999-09-01 (All new papers)
- NEP-ETS-1999-09-01 (Econometric Time Series)
- NEP-FIN-1999-09-01 (Finance)
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