Implicit Bayesian Inference Using Option Prices
AbstractA Bayesian approach to option pricing is presented, in which posterior inference about the underlying returns process is conducted implicitly via observed option prices. A range of models allowing for conditional leptokurtosis, skewness and time-varying volatility in returns are considered, with posterior parameter distributions and model probabilities backed out from the option prices. Models are ranked according to several criteria, including out-of-sample fit, predictive and hedging performance. The methodology accommodates heteroscedasticity and autocorrelation in the option pricing errors, as well as regime shifts across contract groups. The method is applied to intraday option price data on the S&P500 stock index for 1995. Whilst the results provide support for models which accommodate leptokurtosis, no one model dominates according to all criteria considered.
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Bibliographic InfoPaper provided by Monash University, Department of Econometrics and Business Statistics in its series Monash Econometrics and Business Statistics Working Papers with number 5/03.
Length: 36 pages
Date of creation: Feb 2003
Date of revision:
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Postal: PO Box 11E, Monash University, Victoria 3800, Australia
Web page: http://www.buseco.monash.edu.au/depts/ebs/
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Other versions of this item:
- Martin, G.M. & Forbes, C.S. & Martin, V.L., 2000. "Implicit Bayesian Inference Using Option Prices," Monash Econometrics and Business Statistics Working Papers 5/00, Monash University, Department of Econometrics and Business Statistics.
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-02-24 (All new papers)
- NEP-ECM-2003-02-26 (Econometrics)
- NEP-FIN-2003-02-24 (Finance)
- NEP-FMK-2003-02-24 (Financial Markets)
- NEP-RMG-2003-02-24 (Risk Management)
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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Monash Econometrics and Business Statistics Working Papers
1/02, Monash University, Department of Econometrics and Business Statistics.
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- Lim, G.C. & Martin, G.M. & Martin, V.L., 2006. "Pricing currency options in the presence of time-varying volatility and non-normalities," Journal of Multinational Financial Management, Elsevier, vol. 16(3), pages 291-314, July.
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