Martingalized historical approach for option pricing

C. Chorro, D. Guégan and Florian Ielpo

Finance Research Letters, 2010, vol. 7, issue 1, 24-28

Abstract: In a discrete time option pricing framework, we compare the empirical performance of two pricing methodologies, namely the affine stochastic discount factor (SDF) and the empirical martingale correction methodologies. Using a CAC 40 options dataset, the differences are found to be small: the higher order moment correction involved in the SDF approach may not be that essential to reduce option pricing errors. This paper puts into evidence the fact that an appropriate modelling under the historical measure associated with an adequate correction (that we call here a "martingale correction") permits to provide option prices which are close to market ones.

Keywords: Generalized; Hyperbolic; distribution; Option; pricing; Incomplete; market; CAC; 40; Stochastic; discount; factor; Martingale; correction (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (15)

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Related works:
Working Paper: Martingalized Historical approach for Option Pricing (2010)
Working Paper: Martingalized Historical approach for Option Pricing (2009)
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