What drives option prices ?
AbstractWe rely on high frequency data to explore the joint dynamics of underlying and option markets. In particular, high frequency data make observable the realized variance process of the underlying, so its effects on option price dynamics are tested. Empirical results are confronted with the predictions of stochastic volatility models. The study reveals that while the modeling of stochastic volatility gives more robust models, the market does not process information on the realized variance to update option prices.
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Date of creation: 13 Apr 2012
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options; microstructure; smile; stochastic volatility;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-04-23 (All new papers)
- NEP-FMK-2012-04-23 (Financial Markets)
- NEP-MST-2012-04-23 (Market Microstructure)
- NEP-ORE-2012-04-23 (Operations Research)
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.:
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- Charles Quanwei Cao & Gurdip S. Bakshi & Zhiwu Chen, 1997. "Empirical Performance of Alternative Option Pricing Models," Yale School of Management Working Papers ysm54, Yale School of Management.
- Maria Elvira Mancino & Paul Malliavin, 2002. "Fourier series method for measurement of multivariate volatilities," Finance and Stochastics, Springer, vol. 6(1), pages 49-61.
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