Economics at your fingertips  

GARCH option pricing with volatility derivatives

Dong Hwan Oh and Yang-Ho Park

Journal of Banking & Finance, 2023, vol. 146, issue C

Abstract: This paper studies benefits of joint estimations for GARCH option pricing that utilize both stock returns and volatility derivatives. The proposed estimations not only provide realistic volatility term structures but also generate flat skewness term structures much like those seen in the S&P 500 index (SPX) options data. In particular, the estimated GARCH models yield a highly persistent volatility component, which allows the leverage effect to hold up until long horizons. Such a persistent volatility component is key to modeling long-term tail risk and pricing long-term put options. Overall, our exercise highlights the usefulness of volatility derivatives in GARCH option valuation.

Keywords: GARCH; Option valuation; VIX Derivatives; Volatility persistence (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

Downloads: (external link)
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:

DOI: 10.1016/j.jbankfin.2022.106718

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

Page updated 2024-02-18
Handle: RePEc:eee:jbfina:v:146:y:2023:i:c:s0378426622002989