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Martingalized historical approach for option pricing

  • Chorro, C.
  • Guégan, D.
  • Ielpo, F.

In a discrete time option pricing framework, we compare the empirical performance of two pricing methodologies, namely the affine stochastic discount factor (SDF) and the empirical martingale correction methodologies. Using a CAC 40 options dataset, the differences are found to be small: the higher order moment correction involved in the SDF approach may not be that essential to reduce option pricing errors. This paper puts into evidence the fact that an appropriate modelling under the historical measure associated with an adequate correction (that we call here a "martingale correction") permits to provide option prices which are close to market ones.

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Article provided by Elsevier in its journal Finance Research Letters.

Volume (Year): 7 (2010)
Issue (Month): 1 (March)
Pages: 24-28

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Handle: RePEc:eee:finlet:v:7:y:2010:i:1:p:24-28
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  1. Jin-Chuan Duan & Jean-Guy Simonato, 1995. "Empirical Martingale Simulation for Asset Prices," CIRANO Working Papers 95s-43, CIRANO.
  2. Mercuri, Lorenzo, 2008. "Option pricing in a Garch model with tempered stable innovations," Finance Research Letters, Elsevier, vol. 5(3), pages 172-182, September.
  3. Robert J. Elliott & Dilip B. Madan, 1998. "A Discrete Time Equivalent Martingale Measure," Mathematical Finance, Wiley Blackwell, vol. 8(2), pages 127-152.
  4. Jin-Chuan Duan & Jean-Guy Simonato, 1998. "Empirical Martingale Simulation for Asset Prices," Management Science, INFORMS, vol. 44(9), pages 1218-1233, September.
  5. Christophe Chorro & Dominique Guegan & Florian Ielpo, 2008. "Option pricing under GARCH models with generalized hyperbolic innovations (II) : data and results," Documents de travail du Centre d'Economie de la Sorbonne b08047, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  6. Christophe Chorro & Dominique Guegan & Florian Ielpo, 2008. "Option Pricing under GARCH models with Generalized Hyperbolic innovations (I) : Methodology," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00281585, HAL.
  7. 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.
  8. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
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