What drives option prices ?

Frédéric Abergel () and Riadh Zaatour ()
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Frédéric Abergel: FiQuant - Chaire de finance quantitative - MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec, MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris
Riadh Zaatour: FiQuant - Chaire de finance quantitative - MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec, MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris

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Abstract: We rely on high frequency data to explore the joint dynamics of underlying and option markets. In particular, high frequency data make observable the realized variance process of the underlying, so its effects on option price dynamics are tested. Empirical results are confronted with the predictions of stochastic volatility models. The study reveals that while the modeling of stochastic volatility gives more robust models, the market does not process information on the realized variance to update option prices.

Keywords: options; microstructure; smile; stochastic volatility (search for similar items in EconPapers)
Date: 2012-06
New Economics Papers: this item is included in nep-fmk and nep-mst
Note: View the original document on HAL open archive server: https://hal.science/hal-00687675
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Citations: View citations in EconPapers (1)

Published in Journal of Trading, 2012, 7 (3), pp.12-28. ⟨10.3905/jot.2012.7.3.012⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00687675

DOI: 10.3905/jot.2012.7.3.012

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