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Martingalized Historical approach for Option Pricing

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Author Info
Christophe Chorro () (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
Dominique Guegan () (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, 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 Panthéon-Sorbonne - Paris I)

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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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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00437927_v1.

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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_v1

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

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Mercuri, Lorenzo, 2008. "Option pricing in a Garch model with tempered stable innovations," Finance Research Letters, Elsevier, vol. 5(3), pages 172-182, September. [Downloadable!] (restricted)
  2. Christophe Chorro & Dominique Guegan & Florian Ielpo, 2008. "Option Pricing under GARCH models with Generalized Hyperbolic innovations (I) : Methodology," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00281585_v1, HAL. [Downloadable!]
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  3. 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 b08047, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne. [Downloadable!]
  4. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June. [Downloadable!] (restricted)
  5. Jin-Chuan Duan & Jean-Guy Simonato, 1995. "Empirical Martingale Simulation for Asset Prices," CIRANO Working Papers 95s-43, CIRANO. [Downloadable!]
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