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The approximate option pricing model: performances and dynamic properties

  • Capelle-Blancard, Gunther
  • Jurczenko, Emmanuel
  • Maillet, Bertrand

Using high frequency data from ParisBourse SA, this article examines pricing and hedging performances of the Jarrow and Rudd (Journal of Financial Economics 10 (1982) pp. 347–369) model. We first find that this model improves the pricing of CAC 40 index European call options whether in-sample or out-of-sample, and whatever economic or statistic criterion may be used. Moreover, simple models for implied moments lead—in a dynamic setting—to results very close to those from in-sample optimization. But, we also find that this model does not improve hedging strategy and that the Black and Scholes (Journal of Political Economy (1973) pp. 637–655) model is still difficult to beat.

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Article provided by Elsevier in its journal Journal of Multinational Financial Management.

Volume (Year): 11 (2001)
Issue (Month): 4-5 (December)
Pages: 427-443

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Handle: RePEc:eee:mulfin:v:11:y:2001:i:4-5:p:427-443
Contact details of provider: Web page: http://www.elsevier.com/locate/mulfin

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  1. Dilip B. Madan & Frank Milne, 1994. "Contingent Claims Valued And Hedged By Pricing And Investing In A Basis," Mathematical Finance, Wiley Blackwell, vol. 4(3), pages 223-245.
  2. Hwang, S. & Satchell, S. E., 1998. "Implied Volatility Forecasting: A Comparison of Different Procedures," Accounting and Finance Discussion Papers 98-af38, Faculty of Economics, University of Cambridge.
  3. Charles Quanwei Cao & Gurdip S. Bakshi & Zhiwu Chen, 1997. "Empirical Performance of Alternative Option Pricing Models," Yale School of Management Working Papers ysm54, Yale School of Management.
  4. Heston, Steven L, 1993. " Invisible Parameters in Option Prices," Journal of Finance, American Finance Association, vol. 48(3), pages 933-47, July.
  5. Scott, Louis O., 1987. "Option Pricing when the Variance Changes Randomly: Theory, Estimation, and an Application," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(04), pages 419-438, December.
  6. 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.
  7. Jati Sengupta & Yijuan Zheng, 1997. "Estimating skewness persistence in market returns," Applied Financial Economics, Taylor & Francis Journals, vol. 7(5), pages 549-558.
  8. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
  9. Mark Rubinstein., 1994. "Implied Binomial Trees," Research Program in Finance Working Papers RPF-232, University of California at Berkeley.
  10. Stephen Satchell & John Knight & Soosung Hwang, 1999. "Forecasting Volatility using LINEX Loss Functions," Working Papers wp99-20, Warwick Business School, Finance Group.
  11. Jarrow, Robert & Rudd, Andrew, 1982. "Approximate option valuation for arbitrary stochastic processes," Journal of Financial Economics, Elsevier, vol. 10(3), pages 347-369, November.
  12. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
  13. Steven L. Heston & Saikat Nandi, 1997. "A closed-form GARCH option pricing model," FRB Atlanta Working Paper 97-9, Federal Reserve Bank of Atlanta.
  14. 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.
  15. Bernard Dumas & Jeff Fleming & Robert E. Whaley, 1998. "Implied Volatility Functions: Empirical Tests," Journal of Finance, American Finance Association, vol. 53(6), pages 2059-2106, December.
  16. Leitch, Gordon & Tanner, J Ernest, 1991. "Economic Forecast Evaluation: Profits versus the Conventional Error Measures," American Economic Review, American Economic Association, vol. 81(3), pages 580-90, June.
  17. Rubinstein, Mark, 1994. " Implied Binomial Trees," Journal of Finance, American Finance Association, vol. 49(3), pages 771-818, July.
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