A GARCH option pricing model with filtered historical simulation
Informazioni aggiuntive
Autori
Barone Adesi G.,
Engle R. F.,
Mancini L.
Tipo
Articolo pubblicato in rivista scientifica
Anno
2008
Lingua
Inglese
Sommario
We propose a new method for pricing options based on GARCH models with filtered historical innovaions. In an incomplete market framework, we allow for different distributions of historical and pricing return dynamics, which enhances the model’s flexibility to fit market option prices. An extensive empirical analysis based on S&P 500 Index options shows that our model outperforms other competing GARCH pricing models and ad hoc Black–Scholes models. We show that the flexible change of measure, the asymmetric GARCH volatility, and the nonparametric innovation distribution induce the accurate pricing performance of our model. Using a nonparametric approach, we obtain decreasing state price densities per unit probability as suggested by economic theory and corroborating our GARCH pricing model. Implied volatility smiles appear to be explained by asymmetric volatility and negative skewness of filtered historical innovations.
Parole chiave
Option pricing, GARCH model, state price density, Monte Carlo simulation
Periodico
The review of financial studies
Volume
21
Numero ( Mese )
3
Pagine (o numero dell’articolo)
1223-1258
Diffusione
Licenza
Licenza non definita
Visibilità
Pubblico
Status open access
Green
