On practitioners closed-form GARCH option pricing

Sharif Mozumder, Bart Frijns, Bakhtear Talukdar and M. Humayun Kabir

International Review of Financial Analysis, 2024, vol. 94, issue C

Abstract: This paper proposes a practitioner version of Heston and Nandi's (2000) (HN) model, which we term the Practitioner's Heston Nandi, or PHN model. We compare the option pricing and hedging performance of the PHN model vis-à-vis the HN model. Instead of using a one-period ahead volatility forecast for all options used in calibrations at any given time, the PHN model proposes using forward-looking ad-hoc volatilities (implied by market option prices) for each individual option and maturity in calibration and hedging. Since the proposed PHN model uses only option price data, it renders historical stock price data redundant, cutting the data requirement in derivative valuation. We employ options traded at CBOE for the period January 1, 2016 to December 31, 2018 and show that the proposed PHN model yields quick calibration and significantly improves pricing and hedging for European-style options.

Keywords: Heston-Nandi model; Market price of risk; Hedging; European-style options (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S105752192400228X
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:94:y:2024:i:c:s105752192400228x

DOI: 10.1016/j.irfa.2024.103296

Access Statistics for this article

International Review of Financial Analysis is currently edited by B.M. Lucey

More articles in International Review of Financial Analysis from Elsevier
Bibliographic data for series maintained by Catherine Liu ().