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Empirical Assessment of an Intertemporal Option Pricing Model with Latent Variables

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  • René Garcia

    (Crest)

  • Richard Luger

    (Crest)

  • Eric Renault

    (Crest)

Abstract

This paper assesses the empirical performance of an intertemporal option pricing model with latent variables which generalizes the Hull-White stochastic volatility formula. Using this generalized formula in an ad-hoc fashion to extract two implicit parameters and forecast next day S&P 500 option prices, we obtain similar pricing errors than with implied volatility alone as in the Hull-White case. When we specialize this model to an equilibrium recursive utility model, we show through simulations that option prices are more informative than stock prices about the structural parameters of the model. We also show that a simple method of moments with a panel of option prices provides good estimates of the parameters of the model. This lays the ground for an empirical assessment of this equilibrium model with S&P 500 option prices in terms of pricing errors.
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • René Garcia & Richard Luger & Eric Renault, 2000. "Empirical Assessment of an Intertemporal Option Pricing Model with Latent Variables," Working Papers 2000-56, Center for Research in Economics and Statistics.
    • Handle: RePEc:crs:wpaper:2000-56
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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General

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