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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by EconWPA in its series Finance with number 0504005.
Length: 30 pages
Date of creation: 06 Apr 2005
Date of revision:
Note: Type of Document - pdf; pages: 30
Contact details of provider:
Web page: http://188.8.131.52
GARCH; S&P100; index options;
Other versions of this item:
- Ayla Ogus, 2002. "Pricing of S&P 100 Index Options Based On Garch Volatility Estimates," Working Papers 0201, Izmir University of Economics.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
This paper has been announced in the following NEP Reports:
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.:
- Kamara, Avraham & Miller, Thomas W., 1995. "Daily and Intradaily Tests of European Put-Call Parity," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(04), pages 519-539, December.
- Jorion, Philippe, 1995. " Predicting Volatility in the Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 50(2), pages 507-28, June.
- Chou, Ray Yeutien, 1988. "Volatility Persistence and Stock Valuations: Some Empirical Evidence Using Garch," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 3(4), pages 279-94, October-D.
- Ackert, Lucy F. & Tian, Yisong S., 2001.
"Efficiency in index options markets and trading in stock baskets,"
Journal of Banking & Finance,
Elsevier, vol. 25(9), pages 1607-1634, September.
- Lucy F. Ackert & Yisong S. Tian, 1999. "Efficiency in index options markets and trading in stock baskets," Working Paper 99-5, Federal Reserve Bank of Atlanta.
- Galai, Dan, 1977. "Tests of Market Efficiency of the Chicago Board Options Exchange," The Journal of Business, University of Chicago Press, vol. 50(2), pages 167-97, April.
- 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.
- Day, Theodore E. & Lewis, Craig M., 1988. "The behavior of the volatility implicit in the prices of stock index options," Journal of Financial Economics, Elsevier, vol. 22(1), pages 103-122, October.
- Duan, Jin-Chuan & Zhang, Hua, 2001. "Pricing Hang Seng Index options around the Asian financial crisis - A GARCH approach," Journal of Banking & Finance, Elsevier, vol. 25(11), pages 1989-2014, November.
- Hull, John C & White, Alan D, 1987. " The Pricing of Options on Assets with Stochastic Volatilities," Journal of Finance, American Finance Association, vol. 42(2), pages 281-300, June.
- Bent Jesper Christensen & Charlotte Strunk Hansen, 2002. "New evidence on the implied-realized volatility relation," European Journal of Finance, Taylor and Francis Journals, vol. 8(2), pages 187-205.
- 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.
- Harvey, Campbell R & Whaley, Robert E, 1991. " S&P 100 Index Option Volatility," Journal of Finance, American Finance Association, vol. 46(4), pages 1251-61, September.
- Evnine, Jeremy & Rudd, Andrew, 1985. " Index Options: The Early Evidence," Journal of Finance, American Finance Association, vol. 40(3), pages 743-56, July.
- Robert F. Engle & Alex Kane & Jaesun Noh, 1993. "Index-Option Pricing with Stochastic Volatility and the Value of Accurate Variance Forecasts," NBER Working Papers 4519, National Bureau of Economic Research, Inc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA).
If references are entirely missing, you can add them using this form.