Discrete time option pricing with flexible volatility estimation

Christian Hafner and Wolfgang Härdle

Finance and Stochastics, 2000, vol. 4, issue 2, 189-207

Abstract: By extending the GARCH option pricing model of Duan (1995) to more flexible volatility estimation it is shown that the prices of out-of-the-money options strongly depend on volatility features such as asymmetry. Results are provided for the properties of the stationary pricing distribution in the case of a threshold GARCH model. For a stock index series with a pronounced leverage effect, simulated threshold GARCH option prices are substantially closer to observed market prices than the Black/Scholes and simulated GARCH prices.

Keywords: Option pricing; volatility; GARCH; threshold GARCH; leverage effect (search for similar items in EconPapers)
JEL-codes: C15 C22 G13 (search for similar items in EconPapers)
Date: 2000-02-10
Note: received: August 1997; final version received: April 1999
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Citations: View citations in EconPapers (20)

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Working Paper: Discrete time option pricing with flexible volatility estimation (2000)
Working Paper: Discrete time option pricing with flexible volatility estimation (1997)
Working Paper: Discrete time option pricing with flexible volatility estimation (1997)
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