Pricing of S&P 100 Index Options Based On Garch Volatility Estimates
AbstractThis paper is a contribution to the vast literature on the inefficiency in the index options markets. Previous research has found that trading based on implied volatility forecasts do not generate positive profits for the S&P 500 index options but GARCH volatility forecasts do. Trading based on implied volatility forecasts for the S&P 100 index options also fail to generate profits in excess of transaction costs. This paper shows that trading based on GARCH volatility forecast generates profits in excess of transaction costs for the S&P 100 index options hence there is systematic mispricing in the S&P index options markets. GARCH models fair well due to their flexibility to incorporate asymmetric and nonlinear volatility effects. Improved pricing models should work as well or better.
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Bibliographic InfoPaper provided by Izmir University of Economics in its series Working Papers with number 0201.
Length: 29 pages
Date of creation: Aug 2002
Date of revision:
GARCH; S&P100; index options;
Other versions of this item:
- Ayla Ogus, 2005. "Pricing Of S&P 100 Index Options Based On Garch Volatility Estimates," Finance 0504005, EconWPA.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-09-24 (All new papers)
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