Option pricing using EGARCH models

Christian Schmitt

No 96-20, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

Abstract: Various empirical studies have shown that the time-varying volatility of asset returns can be described by GARCH (generalised autoregressive conditional heteroskedasticity) models. The corresponding GARCH option pricing model of Duan (1995) is capable of depicting the smile-effect which often can be found in option prices. In some derivative markets, however, the slope of the smile is not symmetrical. In this paper an option pricing model in the context of the EGARCH (Exponential GARCH) process will be developed. Extensive numerical analyses suggest that the EGARCH option pricing model is able to explain the different slopes of the smile curve.

Date: 1996
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