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Short-Term Options With Stochastic Volatility: Estimation And Empirical Performance

  • Ángel León

    ()

    (Universidad de Alicante)

  • Gabriele Fiorentini

    ()

    (Universidad de Alicante)

  • Gonzalo Rubio

    (Universidad del País Vasco)

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.

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File URL: http://www.ivie.es/downloads/docs/wpasad/wpasad-2000-25.pdf
File Function: Fisrt version / Primera version, 2000
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Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2000-25.

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Length: 42 pages
Date of creation: Nov 2000
Date of revision:
Publication status: Published by Ivie
Handle: RePEc:ivi:wpasad:2000-25
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  17. Gurdip S. Bakshi & Zhiwu Chen, 1996. "An Alternative Valuation Model for Contingent Claims," Yale School of Management Working Papers ysm78, Yale School of Management.
  18. 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.
  19. Hayne E. Leland., 1984. "Option Pricing and Replication with Transactions Costs," Research Program in Finance Working Papers 144, University of California at Berkeley.
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  23. Jackwerth, Jens Carsten & Rubinstein, Mark, 1996. " Recovering Probability Distributions from Option Prices," Journal of Finance, American Finance Association, vol. 51(5), pages 1611-32, December.
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