Pricing Nikkei 225 Options Using Realized Volatility

Masato Ubukata and Toshiaki Watanabe

The Japanese Economic Review, 2014, vol. 65, issue 4, 431-467

Abstract: type="main">

This article examines option pricing performance using realized volatilities with or without handling microstructure noise, non-trading hours and large jumps. The dynamics of realized volatility is specified by ARFIMA(X) and HAR(X) models. The main results using put options on the Nikkei 225 index are that: (i) the ARFIMAX model performs best; (ii) the Hansen and Lunde (2005a) adjustment for non-trading hours improves the performance; (iii) methods for reducing microstructure noise-induced bias yield better performance, while if the Hansen–Lunde adjustment is used, the other methods are not necessarily needed; and (iv) the performance is unaffected by removing large jumps from realized volatility.

Date: 2014
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