 A TEST OF A GENERAL EQUILIBRIUM STOCK OPTION PRICING MODELPeter Bossaerts and Pierre Hillion Mathematical Finance, 1993, vol. 3, issue 4, 311-347 Abstract: An empirical version of the Cox, Ingersoll, and Ross (1985a) call option pricing model is derived, assuming execution price uncertainty in the options market. the pricing restrictions come in the form of moment conditions in the option pricing error. These can be estimated and tested using a version of the method of simulated moments (MSM). Simulation estimates, obtained by discretely approximating the risk‐neutral processes of the underlying stock price and the interest rate, are substituted for analytically unknown call prices. the asymptotics and other aspects of the MSM estimator are discussed. the model is tested on transaction prices at 15‐minute intervals. It substantially outperforms the Black‐Scholes model. the empirical success of the Cox‐Ingersoll‐Ross model implies that the continuous‐time interest rate implicit in synchronous transaction quotes of 90‐day Treasury‐bill futures contracts is an‐albeit noisy‐proxy for the instantaneous volatility on common stock. the process of the instantaneous volatility is found to be close to nonstationary. It is well approximated by a heteroskedastic unit‐root process. With this approximation, the Cox‐Ingersoll‐Ross model only slightly overprices long‐maturity options. Date: 1993 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bla:mathfi:v:3:y:1993:i:4:p:311-347 Ordering information: This journal article can be ordered from Access Statistics for this article Mathematical Finance is currently edited by Jerome Detemple More articles in Mathematical Finance from Wiley Blackwell |
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