Option pricing with asymmetric heteroskedastic normal mixture models
This paper uses asymmetric heteroskedastic normal mixture models to fit return data and to price options. The models can be estimated straightforwardly by maximum likelihood, have high statistical fit when used on S&P 500 index return data, and allow for substantial negative skewness and time varying higher order moments of the risk neutral distribution. When forecasting out-of-sample a large set of index options between 1996 and 2009, substantial improvements are found compared to several benchmark models in terms of dollar losses and the ability to explain the smirk in implied volatilities. Overall, the dollar root mean squared error of the best performing benchmark component model is 39% larger than for the mixture model. When considering the recent financial crisis this difference increases to 69%.
|Date of creation:||01 Aug 2010|
|Date of revision:|
|Contact details of provider:|| Postal: |
Fax: +32 10474304
Web page: http://www.uclouvain.be/core
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Markus Haas, 2004.
"Mixed Normal Conditional Heteroskedasticity,"
Journal of Financial Econometrics,
Society for Financial Econometrics, vol. 2(2), pages 211-250.
- repec:cup:cbooks:9780521681599 is not listed on IDEAS
- Henri Bertholon & Alain Monfort & Fulvio Pegoraro, 2006.
"Pricing and Inference with Mixtures of Conditionally Normal Processes,"
2006-28, Centre de Recherche en Economie et Statistique.
- Bertholon, H. & Monfort, A. & Pegoraro, F., 2007. "Pricing and Inference with Mixtures of Conditionally Normal Processes," Working papers 188, Banque de France.
- Winfried Pohlmeier & Luc Bauwens & David Veredas, 2007. "High frequency financial econometrics. Recent developments," ULB Institutional Repository 2013/136223, ULB -- Universite Libre de Bruxelles.
- Geman, Hélyette & Carr, Peter & Madan, Dilip B. & Yor, Marc, 2003. "Stochastic Volatility for Levy Processes," Economics Papers from University Paris Dauphine 123456789/1392, Paris Dauphine University.
- Peter Christoffersen & Steve Heston & Kris Jacobs, 2003.
"Option Valuation with Conditional Skewness,"
CIRANO Working Papers
- Charles Quanwei Cao & Gurdip S. Bakshi & Zhiwu Chen, 1998.
"Pricing and Hedging Long-Term Options,"
Yale School of Management Working Papers
ysm90, Yale School of Management.
- James D. Hamilton & Daniel F. Waggoner & Tao Zha, 2007.
"Normalization in Econometrics,"
Taylor & Francis Journals, vol. 26(2-4), pages 221-252.
- Bates, David S., 2000. "Post-'87 crash fears in the S&P 500 futures option market," Journal of Econometrics, Elsevier, vol. 94(1-2), pages 181-238.
- Stentoft, Lars, 2005. "Pricing American options when the underlying asset follows GARCH processes," Journal of Empirical Finance, Elsevier, vol. 12(4), pages 576-611, September.
- Gourieroux, C. & Monfort, A., 2007. "Econometric specification of stochastic discount factor models," Journal of Econometrics, Elsevier, vol. 136(2), pages 509-530, February.
- Bates, David S., 2003. "Empirical option pricing: a retrospection," Journal of Econometrics, Elsevier, vol. 116(1-2), pages 387-404.
When requesting a correction, please mention this item's handle: RePEc:cor:louvco:2010049. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Alain GILLIS)
If references are entirely missing, you can add them using this form.