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Martingalized historical approach for option pricing

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Abstract

In a discrete time option pricing framework, we compare the empirical performance of two pricing methodologies, namely the affine stochastic discount factor and the empirical martingale correction methodologies. Using a CAC 40 options dataset, the differences are found to be small: the higher order moment correction involved in the SDF approach may not be that essential to reduce option pricing errors

Suggested Citation

  • Christophe Chorro & Dominique Guegan & Florian Ielpo, 2009. "Martingalized historical approach for option pricing," Documents de travail du Centre d'Economie de la Sorbonne 09021, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    • Handle: RePEc:mse:cesdoc:09021
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    File URL: ftp://mse.univ-paris1.fr/pub/mse/CES2009/09021.pdf
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    Cited by:

    1. Guégan, Dominique & Ielpo, Florian & Lalaharison, Hanjarivo, 2013. "Option pricing with discrete time jump processes," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2417-2445.
    2. Christophe Chorro & Dominique Guegan & Florian Ielpo, 2010. "Option pricing for GARCH-type models with generalized hyperbolic innovations," Post-Print halshs-00469529, HAL.
    3. Chorro, Christophe & Guégan, Dominique & Ielpo, Florian & Lalaharison, Hanjarivo, 2018. "Testing for leverage effects in the returns of US equities," Journal of Empirical Finance, Elsevier, vol. 48(C), pages 290-306.
    4. Marius-Cristian Frunza & Dominique Guegan & Antonin Lassoudière, 2010. "Dynamic factor analysis of carbon allowances prices: From classic Arbitrage Pricing Theory to Switching Regimes," Post-Print halshs-00505145, HAL.
    5. Marius-Cristian Frunza & Dominique Guegan & Antonin Lassoudière, 2010. "Statistical evidence of tax fraud on the carbon allowances market," Post-Print halshs-00523458, HAL.
    6. Badescu, Alexandru & Elliott, Robert J. & Ortega, Juan-Pablo, 2015. "Non-Gaussian GARCH option pricing models and their diffusion limits," European Journal of Operational Research, Elsevier, vol. 247(3), pages 820-830.
    7. Christophe Chorro & Dominique Guegan & Florian Ielpo & Hanjarivo Lalaharison, 2014. "Testing for Leverage Effect in Financial Returns," Documents de travail du Centre d'Economie de la Sorbonne 14022, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.

    More about this item

    Keywords

    Generalized hyperbolic distribution; option pricing; incomplete market; CAC 40; stochastic discount factor; martingale correction;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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