Short-Term Options With Stochastic Volatility: Estimation And Empirical Performance
AbstractThis paper examines the stochastic volatility model suggested by Heston (1993). We employ a time-series approach to estimate the model and we discuss the potential effects of time-varying skewness and kurtosis on the performance of the model. In particular, it is found that the model tends to overprice out-of-the-money calls and underprice in-the-money calls. It is also found that the daily volatility risk premium presents a quite volatile behavior over time; however, our evidence suggests that the volatility risk premium has a negligible impact on the pricing performance of Heston´s model.
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Bibliographic InfoPaper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2000-25.
Length: 42 pages
Date of creation: Nov 2000
Date of revision:
Publication status: Published by Ivie
Stochastic; Volatility; Skewness; Kurtosis; Pricing.;
Other versions of this item:
- Gabriele Fiorentini & Angel León & Gonzalo Rubio, . "Short-term options with stochastic volatility: Estimation and empirical performance," Studies on the Spanish Economy 02, FEDEA.
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