Discriminating Between GARCH Models for Option Pricing by Their Ability to Compute Accurate VIX Measures

Option Valuation with Volatility Components, Fat Tails, and Non-Monotonic Pricing Kernels

Christophe Chorro and Rahantamialisoa H Fanirisoa

Journal of Financial Econometrics, 2022, vol. 20, issue 5, 902-941

Abstract: In this article, we discuss the pricing performances of a large collection of GARCH models by questioning the global synergy between the choice of the affine/nonaffine GARCH specification, the use of competing alternatives to the Gaussian distribution, the selection of an appropriate pricing kernel, and the choice of different estimation strategies based on several sets of financial information. Furthermore, the study answers an important question in relation to the correlation between the performance of a pricing scheme and its ability to forecast VIX dynamics. VIX analysis clearly appears as a parsimonious first-stage filter to discard the worst GARCH option pricing models.

Keywords: GARCH option pricing models; GARCH implied VIX; estimation strategies; nonmonotonic stochastic discount factors (search for similar items in EconPapers)
JEL-codes: C52 G13 (search for similar items in EconPapers)
Date: 2022
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