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Empirical Performance of the Czech and Hungarian Index Options under Jump

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Author Info

  • Lee, Gabriel S.

    (Institute for Advanced Studies, Vienna)

  • Boss, Michael

    (Oesterreichische Nationalbank)

  • Klisz, Chris

    (Academia Istropolitana Nova)

Abstract

This paper analyses Czech and Hungarian index options that are traded on the Austrian Futures and Options Exchange. We find that the Poisson jump-diffusion and not the GARCH (1,1) process lends statistical support for the data description. We estimate that approximately four-fifth of 4 percent underpricing (for the Czech Index) and 18 percent overpricing (for the Hungarian Index) biases reported for the short term out-of-the-money call options can be explained by the Jump option pricing model. However, we question whether the mispricings from the jump model are operational, especially, in these emerging financial markets.

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File URL: http://www.ihs.ac.at/publications/eco/es-91.pdf
File Function: First version, 2001
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Bibliographic Info

Paper provided by Institute for Advanced Studies in its series Economics Series with number 91.

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Length: 31 pages
Date of creation: Jan 2001
Date of revision:
Handle: RePEc:ihs:ihsesp:91

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Related research

Keywords: Leptokurtosis; Poisson jump-diffusion; GARCH; Equity index;

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References

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  1. Dravid, Ajay & Richardson, Matthew & Sun, Tong-Sheng, 1994. "The pricing of dollar-denominated yen/DM warrants," Journal of International Money and Finance, Elsevier, vol. 13(5), pages 517-536, October.
  2. 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.
  3. Bodurtha, James N. & Courtadon, Georges R., 1987. "Tests of an American Option Pricing Model on the Foreign Currency Options Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(02), pages 153-167, June.
  4. Bates, David S., 1996. "Dollar jump fears, 1984-1992: distributional abnormalities implicit in currency futures options," Journal of International Money and Finance, Elsevier, vol. 15(1), pages 65-93, February.
  5. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
  6. Bates, David S, 1996. "Jumps and Stochastic Volatility: Exchange Rate Processes Implicit in Deutsche Mark Options," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 69-107.
  7. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  8. Jorion, Philippe, 1995. " Predicting Volatility in the Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 50(2), pages 507-28, June.
  9. Amin, Kaushik I, 1993. " Jump Diffusion Option Valuation in Discrete Time," Journal of Finance, American Finance Association, vol. 48(5), pages 1833-63, December.
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