CONVERGENCE SPEED OF GARCH OPTION PRICE TO DIFFUSION OPTION PRICE

Jin-Chuan Duan (), Yazhen Wang () and Jian Zou ()
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Jin-Chuan Duan: National University of Singapore, Singapore
Yazhen Wang: University of Wisconsin and National Science Foundation, USA
Jian Zou: University of Connecticut, USA

International Journal of Theoretical and Applied Finance (IJTAF), 2009, vol. 12, issue 03, 359-391

Abstract: It is well known that as the time interval between two consecutive observations shrinks to zero, a properly constructed GARCH model will weakly converge to a bivariate diffusion. Naturally the European option price under the GARCH model will also converge to its bivariate diffusion counterpart. This paper investigates the convergence speed of the GARCH option price. We show that the European option prices under the two corresponding models are equal up to an order near the square root of the length of discrete time interval.

Keywords: Convergence rate; European option; stochastic volatility (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (4)

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DOI: 10.1142/S0219024909005269

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