 Monte Carlo option pricing with asymmetric realized volatility dynamicsDavid Allen, Michael McAleer and Marcel Scharth () Mathematics and Computers in Simulation (MATCOM), 2011, vol. 81, issue 7, 1247-1256 Abstract: What are the advances introduced by realized volatility models in pricing options? In this short paper we analyze a simple option pricing framework based on the dually asymmetric realized volatility model, which emphasizes extended leverage effects and empirical regularity of high volatility risk during high volatility periods. We conduct a brief empirical analysis of the pricing performance of this approach against some benchmark models using data from the S&P 500 options in the 2001–2004 period. The results indicate that as expected the superior forecasting accuracy of realized volatility translates into significantly smaller pricing errors when compared to models of the GARCH family. Most importantly, our results indicate that the presence of leverage effects and a high volatility risk are essential for understanding common option pricing anomalies. Keywords: Realized volatility; Option pricing; Volatility of volatility; Leverage effects (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:matcom:v:81:y:2011:i:7:p:1247-1256 DOI: 10.1016/j.matcom.2010.06.010 Access Statistics for this article Mathematics and Computers in Simulation (MATCOM) is currently edited by Robert Beauwens More articles in Mathematics and Computers in Simulation (MATCOM) from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.