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Bayesian Option Pricing using Asymmetric Garch Models

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Author Info
Bauwens, L.
Lubrano, M.

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Abstract

This paper shows how one can compute option prices from a Bayesian inference view point, using a GARCH model for the dynamics of the the volatility of the underlying asset. The proposed evaluation of an option is the predictive expectation of its payoff function. The predictive distribution of this function provides a natural metric, provided it is neutralised with respect to the risk, for gauging the predictive option price or other option evaluations. The proposed method is compared to the Black and Scholes evaluation, in which a marginal mean volatility is plugged, but which does not provide a natural metric. The methods are illustrated using symmetric, asymmetric and smooth transition GARCH models with data on a stock index in Brussels.

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Publisher Info
Paper provided by Universite Aix-Marseille III in its series G.R.E.Q.A.M. with number 00a18.

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Length: 23 pages
Date of creation: 2000
Date of revision:
Handle: RePEc:fth:aixmeq:00a18

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Postal: G.R.E.Q.A.M., (GROUPE DE RECHERCHE EN ECONOMIE QUANTITATIVE D'AIX MARSEILLE), CENTRE DE VIEILLE CHARITE, 2 RUE DE LA CHARITE, 13002 MARSEILLE.
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Related research
Keywords: PRICING ; EXPECTATIONS ; ECONOMETRIC MODELS;

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Find related papers by JEL classification:
C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Bayesian Analysis
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

Cited by:
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  1. Jeroen Rombouts & Lars Peter Stentoft, 2009. "Bayesian Option Pricing Using Mixed Normal Heteroskedasticity Models," CIRANO Working Papers 2009s-19, CIRANO. [Downloadable!]
    Other versions:
  2. Satoru Kanoh & Asuka Takeuchi, 2006. "An Analysis of Option Pricing in the Japanese Market," Hi-Stat Discussion Paper Series d05-145, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
  3. Gael M. Martin & Catherine S. Forbes & Vance L. Martin, 2003. "Implicit Bayesian Inference Using Option Prices," Monash Econometrics and Business Statistics Working Papers 5/03, Monash University, Department of Econometrics and Business Statistics. [Downloadable!]
    Other versions:
  4. Jeroen V.K. Rombouts & Lars Stentoft, 2009. "Bayesian Option Pricing Using Mixed Normal Heteroskedasticity," Cahiers de recherche 0926, CIRPEE. [Downloadable!]
  5. David B. Flynn & Simone D. Grose & Gael M. Martin & Vance L. Martin, 2003. "Pricing Australian S&P200 Options: A Bayesian Approach Based on Generalized Distributional Forms," Monash Econometrics and Business Statistics Working Papers 6/03, Monash University, Department of Econometrics and Business Statistics. [Downloadable!]
  6. Darsinos, T. & Satchell, S.E., 2001. "Bayesian Forecasting of Options Prices: A Natural Framework for Pooling Historical and Implied Volatiltiy Information," Cambridge Working Papers in Economics 0116, Faculty of Economics, University of Cambridge. [Downloadable!]
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