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GARCH Option Valuation: Theory and Evidence

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  • Peter Christoffersen

    () (University of Toronto - Rotman School of Management and CREATES)

  • Kris Jacobs

    () (University of Houston and Tilburg University)

  • Chayawat Ornthanalai

    (Georgia Institute of Technology)

Abstract

We survey the theory and empirical evidence on GARCH option valuation models. Our treatment includes the range of functional forms available for the volatility dynamic, multifactor models, nonnormal shock distributions as well as style of pricing kernels typically used. Various strategies for empirical implementation are laid out and we also discuss the links between GARCH and stochastic volatility models. In the appendix we provide Matlab computer code for option pricing via Monte Carlo simulation for nonaffine models as well as Fourier inversion for affine models.

Suggested Citation

  • Peter Christoffersen & Kris Jacobs & Chayawat Ornthanalai, 2012. "GARCH Option Valuation: Theory and Evidence," CREATES Research Papers 2012-50, Department of Economics and Business Economics, Aarhus University.
  • Handle: RePEc:aah:create:2012-50
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    Cited by:

    1. Kanniainen, Juho & Lin, Binghuan & Yang, Hanxue, 2014. "Estimating and using GARCH models with VIX data for option valuation," Journal of Banking & Finance, Elsevier, vol. 43(C), pages 200-211.

    More about this item

    Keywords

    GARCH; option valuation.;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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