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Calibration of the Hobson&Rogers model: empirical tests

Author

Listed:
  • Andrea Pascucci

    (Università di Bologna, Italy)

  • Paolo Foschi

    (Università di Bologna, Italy)

Abstract

The path-dependent volatility model by Hobson and Rogers is considered. It is known that this model can potentially reproduce the observed smile and skew patterns of different directions, while preserving the completeness of the market. In order to quantitatively investigate the pricing performance of the model a calibration procedure is here derived. Numerical results based on S&P500 option prices give evidence of the effectiveness of the model.

Suggested Citation

  • Andrea Pascucci & Paolo Foschi, 2005. "Calibration of the Hobson&Rogers model: empirical tests," Finance 0509020, EconWPA.
  • Handle: RePEc:wpa:wuwpfi:0509020 Note: Type of Document - pdf; pages: 26
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    File URL: http://econwpa.repec.org/eps/fin/papers/0509/0509020.pdf
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    References listed on IDEAS

    as
    1. David G. Hobson & L. C. G. Rogers, 1998. "Complete Models with Stochastic Volatility," Mathematical Finance, Wiley Blackwell, vol. 8(1), pages 27-48.
    2. René Garcia & Eric Ghysels & Éric Renault, 2004. "The Econometrics of Option Pricing," CIRANO Working Papers 2004s-04, CIRANO.
    3. Andrea Pascucci & Marco Di Francesco, 2005. "On the complete model with stochastic volatility by Hobson and Rogers," Finance 0503013, EconWPA.
    4. Carl Chiarella & Oh-Kang Kwon, 2000. "A Complete Stochastic Volatility Model in the HJM Framework," Research Paper Series 43, Quantitative Finance Research Centre, University of Technology, Sydney.
    5. Mark Broadie & Mikhail Chernov & Michael Johannes, 2007. "Model Specification and Risk Premia: Evidence from Futures Options," Journal of Finance, American Finance Association, vol. 62(3), pages 1453-1490, June.
    6. Bates, David S., 2000. "Post-'87 crash fears in the S&P 500 futures option market," Journal of Econometrics, Elsevier, vol. 94(1-2), pages 181-238.
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    Cited by:

    1. Sekine, Jun, 2008. "Marginal distribution of some path-dependent stochastic volatility model," Statistics & Probability Letters, Elsevier, vol. 78(13), pages 1846-1850, September.
    2. Paolo Foschi & Andrea Pascucci, 2008. "Path dependent volatility," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 31(1), pages 13-32, May.
    3. Olesia Verchenko, 2011. "Testing option pricing models: complete and incomplete markets," Discussion Papers 38, Kyiv School of Economics.

    More about this item

    JEL classification:

    • G - Financial Economics

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