Option pricing with overnight and intraday volatility

Fang Liang, Lingshan Du and Zhuo Huang

Journal of Futures Markets, 2023, vol. 43, issue 11, 1576-1614

Abstract: Efficiently exploiting the volatility information contained in price variations is important for pricing options and other derivatives. In this study, we develop a new and flexible option‐pricing model that explicitly specifies the joint dynamics of overnight and intraday returns. The application of multivariate Edgeworth–Sargan density enables us to derive analytical approximations for option valuation formulas. Empirically, the model improves significantly upon benchmark models using S&P 500 index options. In particular, its separate modeling of intraday and overnight return volatility leads to an out‐of‐sample gain of 7.24% in pricing accuracy compared with the modeling of the close‐to‐close return volatility as a whole. The improvements are more pronounced during highly volatile periods.

Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://doi.org/10.1002/fut.22448

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:jfutmk:v:43:y:2023:i:11:p:1576-1614

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0270-7314

Access Statistics for this article

Journal of Futures Markets is currently edited by Robert I. Webb

More articles in Journal of Futures Markets from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley Content Delivery ().