Discrete time option pricing with flexible volatility estimation
By extending the GARCH option pricing model of Duan (1995) to more flexible volatility es- timation it is shown that the prices of out-of-the-money options strongly depend on volatility features such as asymmetry. Results are provided for the properties of the stationary pricing distribution in the case of a threshold GARCH model. For a stock index series with a pro- nounced leverage effect, simulated threshold GARCH option prices are substantially closer to observed market prices than the Black/Scholes and simulated GARCH prices.
|Date of creation:||01 Jun 1997|
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