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GARCH Options in Incomplete Markets

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  • Barone-Adesi, Giovanni
  • Engle, Robert
  • Mancini, Loriano

Abstract

We propose a new method to compute option prices based on GARCH models. In an incomplete market framework, we allow for the volatility of asset return to differ from the volatility of the pricing process and obtain adequate pricing results. We investigate the pricing performance of this approach over short and long time horizons by calibrating theoretical option prices under the Asymmetric GARCH model on S&P 500 market option prices. A new simplified scheme for delta hedging is proposed.

Suggested Citation

  • Barone-Adesi, Giovanni & Engle, Robert & Mancini, Loriano, 2006. "GARCH Options in Incomplete Markets," CEI Working Paper Series 2005-12, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
    • Handle: RePEc:hit:hitcei:2005-12
    Note: First Version: March 2004; Revised: October 2004
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    File URL: https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/13506/wp2005-12a.pdf
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