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Testing Option Pricing Models

  • David S. Bates
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    This paper discusses the commonly used methods for testing option pricing models, including the Black-Scholes, constant elasticity of variance, stochastic volatility, and jump-diffusion models. Since options are derivative assets, the central empirical issue is whether the distributions implicit in option prices are consistent with the time series properties of the underlying asset prices. Three relevant aspects of consistency are discussed, corresponding to whether time series-based inferences and option prices agree with respect to volatility, changes in volatility, and higher moments. The paper surveys the extensive empirical literature on stock options, options on stock indexes and stock index futures, and options on currencies and currency futures.

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    File URL: http://www.nber.org/papers/w5129.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5129.

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    Date of creation: May 1995
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    Publication status: published as in G.S. Maddale and C.R. Rao, editers, Handbook of Statistics: Statistical Methods in Finance, Vol. 14, 1996, pp. 567-611.
    Handle: RePEc:nbr:nberwo:5129
    Note: AP
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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