Advanced Search
MyIDEAS: Login to save this paper or follow this series

Option pricing under linear autoregressive dynamics, heteroskedasticity, and conditional leptokurtosis

Contents:

Author Info

  • Hafner, Christian M.
  • Herwartz, Helmut

Abstract

Daily returns of financial assets are frequently found to exhibit positive autocorrelation at lag 1. When specifying a linear AR(l) conditional mean, one may ask how this predictability affects option prices. We investigate the dependence of option prices on autoregressive dynamics under stylized facts of stock returns, i.e., conditional heteroskedasticity: leverage effect, and conditional leptokurtosis. Our analysis covers both a continuous and discrete time framework. The results suggest that a non-zero autoregression coefficient tends to increase the deviation of option prices from Black & Scholes prices caused by stochastic volatility. --

Download Info

If 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.
File URL: http://econstor.eu/bitstream/10419/61730/1/722297521.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes in its series SFB 373 Discussion Papers with number 1999,58.

as in new window
Length:
Date of creation: 1999
Date of revision:
Handle: RePEc:zbw:sfb373:199958

Contact details of provider:
Postal: Spandauer Str. 1,10178 Berlin
Phone: +49-30-2093-5708
Fax: +49-30-2093-5617
Email:
Web page: http://www.wiwi.hu-berlin.de/
More information through EDIRC

Related research

Keywords: option pricing; autoregression; heteroskedasticity; GARCH; leverage effect; conditional leptokurtosis;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
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.:
as in new window
  1. Andrew W. Lo & Jiang Wang, 1994. "Implementing Option Pricing Models When Asset Returns Are Predictable," NBER Working Papers 4720, National Bureau of Economic Research, Inc.
  2. Härdle, Wolfgang & Hafner, Christian M., 1997. "Discrete time option pricing with flexible volatility estimation," SFB 373 Discussion Papers 1997,56, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  3. Drost, F.C. & Nijman, T.E., 1990. "Temporal Aggregation Of Garch Processes," Papers 9066, Tilburg - Center for Economic Research.
  4. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-31, February.
  5. Drost, F.C. & Werker, B.J.M., 1994. "Closing the GARCH gap: Continuous time GARCH modeling," Discussion Paper 1994-2, Tilburg University, Center for Economic Research.
  6. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  7. H. Herwartz, 1998. "Structural Analysis of Portfolio Risk Using Beta Impulse Response Functions," SFB 373 Discussion Papers 1998,41, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  8. Christian M. Hafner & Helmut Herwartz, 2000. "Testing for linear autoregressive dynamics under heteroskedasticity," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 177-197.
  9. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
  10. Norbert Hofmann & Eckhard Platen & Martin Schweizer, 1992. "Option Pricing Under Incompleteness and Stochastic Volatility," Mathematical Finance, Wiley Blackwell, vol. 2(3), pages 153-187.
  11. 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.
  12. repec:wop:humbsf:1998-41 is not listed on IDEAS
  13. Jin-Chuan Duan, 1995. "The Garch Option Pricing Model," Mathematical Finance, Wiley Blackwell, vol. 5(1), pages 13-32.
  14. Nelson, Daniel B., 1990. "ARCH models as diffusion approximations," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 7-38.
  15. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
  16. repec:wop:humbsf:1999-7 is not listed on IDEAS
  17. 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.
  18. Engle, Robert F & Lilien, David M & Robins, Russell P, 1987. "Estimating Time Varying Risk Premia in the Term Structure: The Arch-M Model," Econometrica, Econometric Society, vol. 55(2), pages 391-407, March.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Karanasos, Menelaos & Kim, Jinki, 2006. "A re-examination of the asymmetric power ARCH model," Journal of Empirical Finance, Elsevier, vol. 13(1), pages 113-128, January.
  2. BAUWENS , Luc & LUBRANO, Michel, . "Bayesian option pricing using asymmetric GARCH models," CORE Discussion Papers RP -1569, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. V. L. Martin & G. M. Martin & G. C. Lim, 2005. "Parametric pricing of higher order moments in S&P500 options," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(3), pages 377-404.
  4. Lars Stentoft, 2008. "American Option Pricing Using GARCH Models and the Normal Inverse Gaussian Distribution," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 6(4), pages 540-582, Fall.
  5. Darsinos, T. & Satchell, S.E., 2001. "Bayesian Forecasting of Options Prices: A Natural Framework for Pooling Historical and Implied Volatiltiy Information," Cambridge Working Papers in Economics 0116, Faculty of Economics, University of Cambridge.
  6. 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.
  7. BAUWENS, Luc & HAFNER, Christian & LAURENT, Sébastien, 2011. "Volatility models," CORE Discussion Papers 2011058, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Carmona, Julio & León, Angel & Vaello-Sebastià, Antoni, 2012. "Does stock return predictability affect ESO fair value?," European Journal of Operational Research, Elsevier, vol. 223(1), pages 188-202.
  9. Qingshuo Song & Qing Zhang, 2013. "An Optimal Pairs-Trading Rule," Papers 1302.6120, arXiv.org.
  10. Hafner, C.M., 2003. "Simple approximations for option pricing under mean reversion and stochastic volatility," Econometric Institute Research Papers EI 2003-20, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:zbw:sfb373:199958. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.