An Empirical Investigation of the Market for Comex Gold Futures Options

Warren Bernard Bailey

Journal of Finance, 1987, vol. 42, issue 5, 1187-94

Abstract: Asset-pricing models which assume a constant interest rate may misprice contingent claims if the interest rate fluctuates significantly or if the price of the underlying asset is cor-related with the interest rate. A model per-m itting a stochastic interest rate and correlation of the underlying a sset's price with the interest rate is tested with daily closing pric es for Comex gold futures options. The stochastic interest-rate model is superior to a constant interest-rate model in predicting market p rices. The results suggest that interest-rate volatility is an import ant element in contingent-claims valuation. Copyright 1987 by American Finance Association.

Date: 1987
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