IDEAS home Printed from https://ideas.repec.org/p/hal/journl/halshs-01400242.html

Option Valuation with IG_GARCH Model and an U-Shaped Pricing Kernel

Author

Listed:
  • Christophe Chorro

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

  • Fanirisoa Rahantamialisoa H.

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, Dipartimento di Economia [Venezia] - University of Venice Ca’ Foscari = Université de Venise Ca’ Foscari = Università Ca’ Foscari di Venezia)

Abstract

Empirical and theoretical studies have attempted to establish the U-shape of the log-ratio of conditional risk-neutral and physical probability density functions. The main subject of this paper is to question the use of such a U-shaped pricing kernel to improve option pricing performances. Starting from the so-called Inverse Gaussian GARCH model (IG-GARCH), known to provide semi-closed form formulas for classical European derivatives when an exponential affine pricing kernel is used, we build a new pricing kernel that is non-monotonic and that still has this remarkable property. Using a daily dataset of call options written on the S&P500 index, we compare the pricing performances of these two IG-GARCH models proving, in this framework, that the new exponential U-shaped stochastic discount factor clearly outperforms the classical exponential affine one. What is more, several estimation strategies including options or VIX information are tested taking advantage of the analytical tractability of these models.

Suggested Citation

  • Christophe Chorro & Fanirisoa Rahantamialisoa H., 2016. "Option Valuation with IG_GARCH Model and an U-Shaped Pricing Kernel," Post-Print halshs-01400242, HAL.
    • Handle: RePEc:hal:journl:halshs-01400242
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-01400242v1
    as

    Download full text from publisher

    File URL: https://shs.hal.science/halshs-01400242v1/document
    Download Restriction: no
    ---><---

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hal:journl:halshs-01400242. See general information about how to correct material in RePEc.

    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.

    We have no bibliographic references for this item. You can help adding them by using 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CCSD (email available below). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.