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Martingalized Historical approach for Option Pricing

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  • Christophe Chorro

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)

  • Dominique Guegan

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

  • Florian Ielpo

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)

Abstract

In a discrete time option pricing framework, we compare the empirical performance of two pricing methodologies, namely the affine stochastic discount factor (SDF) and the empirical martingale correction methodologies. Using a CAC 40 options dataset, the differences are found to be small: the higher order moment correction involved in the SDF approach may not be that essential to reduce option pricing errors. This paper puts into evidence the fact that an appropriate modelling under the historical measure associated with an adequate correction (that we call here a ”martingale correction”) permits to provide option prices which are close to market ones.

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Bibliographic Info

Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00437927.

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Date of creation: Mar 2010
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Publication status: Published, Finance Research Letters, 2010, 7, 1, 24-28
Handle: RePEc:hal:cesptp:halshs-00437927

Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00437927
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Related research

Keywords: Generalized Hyperbolic Distribution; Option pricing; Incomplete market; CAC40; Stochastic Discount Factor; Martingale Correction;

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References

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  1. Robert J. Elliott & Dilip B. Madan, 1998. "A Discrete Time Equivalent Martingale Measure," Mathematical Finance, Wiley Blackwell, Wiley Blackwell, vol. 8(2), pages 127-152.
  2. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, Econometric Society, vol. 59(2), pages 347-70, March.
  3. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  4. Mercuri, Lorenzo, 2008. "Option pricing in a Garch model with tempered stable innovations," Finance Research Letters, Elsevier, Elsevier, vol. 5(3), pages 172-182, September.
  5. Christophe Chorro & Dominique Guegan & Florian Ielpo, 2008. "Option pricing under GARCH models with generalized hyperbolic innovations (II) : data and results," Documents de travail du Centre d'Economie de la Sorbonne, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne b08047, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  6. Christophe Chorro & Dominique Guegan & Florian Ielpo, 2008. "Option pricing under GARCH models with generalized hyperbolic innovations (I) : methodology," Documents de travail du Centre d'Economie de la Sorbonne, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne b08037, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  7. Jin-Chuan Duan & Jean-Guy Simonato, 1995. "Empirical Martingale Simulation for Asset Prices," CIRANO Working Papers, CIRANO 95s-43, CIRANO.
  8. Jin-Chuan Duan & Jean-Guy Simonato, 1998. "Empirical Martingale Simulation for Asset Prices," Management Science, INFORMS, INFORMS, vol. 44(9), pages 1218-1233, September.
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Cited by:
  1. Guégan, Dominique & Ielpo, Florian & Lalaharison, Hanjarivo, 2013. "Option pricing with discrete time jump processes," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 37(12), pages 2417-2445.
  2. repec:hal:journl:halshs-00523371 is not listed on IDEAS
  3. Christophe Chorro & Dominique Guegan & Florian Ielpo & Hanjarivo Lalaharison, 2014. "Testing for Leverage Effect in Financial Returns," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers), HAL halshs-00973922, HAL.
  4. repec:hal:journl:halshs-00504209 is not listed on IDEAS

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