Which Option Pricing Model is the Best? High Frequency Data for Nikkei225 Index Options
Option pricing models are the main subject of many research papers prepared both in academia and financial industry. Using high-frequency data for Nikkei225 index options, we check the properties of option pricing models with different assumptions concerning the volatility process (historical, realized, implied, stochastic or based on GARCH model). In order to relax the continuous dividend payout assumption, we use the Black model for pricing options on futures, instead of the Black-Scholes-Merton model. The results are presented separately for 5 classes of moneyness ratio and 5 classes of time to maturity in order to show some patterns in option pricing and to check the robustness of our results. The Black model with implied volatility (BIV) comes out as the best one. Highest average pricing errors we obtain for the Black model with realized volatility (BRV). As a result, we do not see any additional gain from using more complex and time-consuming models (SV and GARCH models. Additionally, we describe liquidity of the Nikkei225 option pricing market and try to compare our results with a detailed study for the emerging market of WIG20 index options (Kokoszczyński et al. 2010b).
|Date of creation:||2010|
|Date of revision:|
|Contact details of provider:|| Postal: ul. Dluga 44/50, 00-241 Warszawa|
Phone: (+48 22) 55 49 144
Fax: (+48 22) 831 28 46
Web page: http://www.wne.uw.edu.pl/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Charles J. Corrado & Tie Su, 1996.
"Skewness And Kurtosis In S&P 500 Index Returns Implied By Option Prices,"
Journal of Financial Research,
Southern Finance Association;Southwestern Finance Association, vol. 19(2), pages 175-192, 06.
- Corrado, Charles J & Su, Tie, 1996. "Skewness and Kurtosis in S&P 500 Index Returns Implied by Option Prices," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 19(2), pages 175-92, Summer.
- V. L. Martin & G. M. Martin & G. C. Lim, 2005.
"Parametric pricing of higher order moments in S&P500 options,"
Journal of Applied Econometrics,
John Wiley & Sons, Ltd., vol. 20(3), pages 377-404.
- G.C. Lim & G.M. Martin & V.L. Martin, 2002. "Parametric Pricing of Higher Order Moments in S&P500 Options," Monash Econometrics and Business Statistics Working Papers 1/02, Monash University, Department of Econometrics and Business Statistics.
When requesting a correction, please mention this item's handle: RePEc:war:wpaper:2010-16. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marcin Bąba)
If references are entirely missing, you can add them using this form.