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Discriminating Between GARCH Models for Option Pricing by Their Ability to Compute Accurate VIX Measures
[Option Valuation with Volatility Components, Fat Tails, and Non-Monotonic Pricing Kernels]

Author

Listed:
  • Christophe Chorro
  • Rahantamialisoa H Fanirisoa

Abstract

In this article, we discuss the pricing performances of a large collection of GARCH models by questioning the global synergy between the choice of the affine/nonaffine GARCH specification, the use of competing alternatives to the Gaussian distribution, the selection of an appropriate pricing kernel, and the choice of different estimation strategies based on several sets of financial information. Furthermore, the study answers an important question in relation to the correlation between the performance of a pricing scheme and its ability to forecast VIX dynamics. VIX analysis clearly appears as a parsimonious first-stage filter to discard the worst GARCH option pricing models.

Suggested Citation

  • Christophe Chorro & Rahantamialisoa H Fanirisoa, 2022. "Discriminating Between GARCH Models for Option Pricing by Their Ability to Compute Accurate VIX Measures [Option Valuation with Volatility Components, Fat Tails, and Non-Monotonic Pricing Kernels]," Journal of Financial Econometrics, Oxford University Press, vol. 20(5), pages 902-941.
  • Handle: RePEc:oup:jfinec:v:20:y:2022:i:5:p:902-941.
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    File URL: http://hdl.handle.net/10.1093/jjfinec/nbaa042
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    More about this item

    Keywords

    GARCH option pricing models; GARCH implied VIX; estimation strategies; nonmonotonic stochastic discount factors;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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