Short-term options with stochastic volatility: Estimation and empirical performance
This paper examines the stochastic volatility model suggested by Heston (1993). We employ a time-series approach to estimate the model and we discuss the potential effects of time-varying skewness and kurtosis on the performance of the model. In particular, it is found that the model tends to overprice out-of-the-money calls and underprice in-the-money calls. It is also found that the daily volatility risk premium presents a quite volatile behavior over time; however, our evidence suggests that the volatility risk premium has a negligible impact on the pricing performance of Heston´s model.
(This abstract was borrowed from another version of this item.)
References listed on IDEAS
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.:
- Das, Sanjiv Ranjan & Sundaram, Rangarajan K., 1999.
"Of Smiles and Smirks: A Term Structure Perspective,"
Journal of Financial and Quantitative Analysis,
Cambridge University Press, vol. 34(02), pages 211-239, June.
- Sanjiv R. Das & Rangarajan K. Sundaram, 1998. "Of Smiles and Smirks: A Term-Structure Perspective," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-024, New York University, Leonard N. Stern School of Business-.
- Duan, Jin-Chuan, 1997. "Augmented GARCH (p,q) process and its diffusion limit," Journal of Econometrics, Elsevier, vol. 79(1), pages 97-127, July.
- Ball, Clifford A. & Roma, Antonio, 1994. "Stochastic Volatility Option Pricing," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(04), pages 589-607, December.
- Yacine Ait-Sahalia & Andrew W. Lo, 1995.
"Nonparametric Estimation of State-Price Densities Implicit in Financial Asset Prices,"
NBER Working Papers
5351, National Bureau of Economic Research, Inc.
- Yacine Aït-Sahalia & Andrew W. Lo, 1998. "Nonparametric Estimation of State-Price Densities Implicit in Financial Asset Prices," Journal of Finance, American Finance Association, vol. 53(2), pages 499-547, 04.
- Yacine Aït-Sahalia & Andrew W. Lo, . "Nonparametric Estimation of State-Price Densities Implicit in Financial Asset Prices," CRSP working papers 332, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
- Hayne E. Leland., 1984.
"Option Pricing and Replication with Transactions Costs,"
Research Program in Finance Working Papers
144, University of California at Berkeley.
- Leland, Hayne E, 1985. " Option Pricing and Replication with Transactions Costs," Journal of Finance, American Finance Association, vol. 40(5), pages 1283-1301, December.
- Corrado, Charles J & Su, Tie, 1996.
"Skewness and Kurtosis in S&P 500 Index Returns Implied by Option Prices,"
Journal of Financial Research,
Southern Finance Association;Southwestern Finance Association, vol. 19(2), pages 175-192, Summer.
- Charles J. Corrado & Tie Su, 1996. "Skewness And Kurtosis In S&P 500 Index Returns Implied By Option Prices," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 19(2), pages 175-192, 06.
- Angel León & Juan Mora, 1999. "Modelling conditional heteroskedasticity: Application to the "IBEX-35" stock-return index," Spanish Economic Review, Springer;Spanish Economic Association, vol. 1(3), pages 215-238.
- Lawrence R. Glosten & Ravi Jagannathan & David E. Runkle, 1993.
"On the relation between the expected value and the volatility of the nominal excess return on stocks,"
157, Federal Reserve Bank of Minneapolis.
- Glosten, Lawrence R & Jagannathan, Ravi & Runkle, David E, 1993. " On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks," Journal of Finance, American Finance Association, vol. 48(5), pages 1779-1801, December.
- Bates, David S, 1996. "Jumps and Stochastic Volatility: Exchange Rate Processes Implicit in Deutsche Mark Options," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 69-107.
- 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.
- Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
- Hull, John C & White, Alan D, 1987. " The Pricing of Options on Assets with Stochastic Volatilities," Journal of Finance, American Finance Association, vol. 42(2), pages 281-300, June.
- Gourieroux, C & Monfort, A & Renault, E, 1993.
Journal of Applied Econometrics,
John Wiley & Sons, Ltd., vol. 8(S), pages S85-118, Suppl. De.
- Jens Carsten Jackwerth., 1996. "Implied Binomial Trees: Generalizations and Empirical Tests," Research Program in Finance Working Papers RPF-262, University of California at Berkeley.
- French, Dan W., 1984. "The weekend effect on the distribution of stock prices : Implications for option pricing," Journal of Financial Economics, Elsevier, vol. 13(4), pages 547-559, December.
- Jackwerth, Jens Carsten & Rubinstein, Mark, 1996. " Recovering Probability Distributions from Option Prices," Journal of Finance, American Finance Association, vol. 51(5), pages 1611-1632, December.
- Gurdip S. Bakshi & Zhiwu Chen, 1996.
"An Alternative Valuation Model for Contingent Claims,"
Yale School of Management Working Papers
ysm78, Yale School of Management.
- Bakshi, Gurdip S. & Zhiwu, Chen, 1997. "An alternative valuation model for contingent claims," Journal of Financial Economics, Elsevier, vol. 44(1), pages 123-165, April.
- Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-43.
- Guo, Dajiang, 1998. "The Risk Premium of Volatility Implicit in Currency Options," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(4), pages 498-507, October.
- Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
- David Backus & Silverio Foresi & Liuren Wu, 2002. "Accouting for Biases in Black-Scholes," Finance 0207008, EconWPA.
- Mikhail Chernov & Eric Ghysels, 1998. "What Data Should Be Used to Price Options?," CIRANO Working Papers 98s-22, CIRANO.
- Eberlein, Ernst & Keller, Ulrich & Prause, Karsten, 1998. "New Insights into Smile, Mispricing, and Value at Risk: The Hyperbolic Model," The Journal of Business, University of Chicago Press, vol. 71(3), pages 371-405, July.
When requesting a correction, please mention this item's handle: RePEc:fda:fdaeee:02. 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: (Carmen Arias)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.