The Impact of Liquidity on GARCH Option Pricing Error during Financial Crisis

Han Ching Huang, Yong Chern Su and Wei-Shen Chen

Applied Economics and Finance, 2017, vol. 4, issue 4, 160-168

Abstract: In this paper, we explore the valuation performance of Heston and Nandi GARCH (HN GARCH) model on the pricing of options of financial stocks listed for AMEX during pre and post financial crisis periods. We find that the GARCH pricing model presents better performance than the traditional Black-Scholes model for the out-of-sample option pricing, no matter what the moneyness and the time-to-maturity. Specifically, the models show the effects of liquidity is not significant. Intuitionally, smaller liquidity tends to exhibit more pricing errors, especially for longer mature options. Unfortunately, we cannot get the expected outcomes, which is that the period of post financial crisis tend to have larger pricing errors. In sum, except more computational convenience, the HN GARCH model offers another vision of the relationship between liquidity and its effect on pricing errors.

Keywords: GARCH option pricing model; HN GARCH model; liquidity; financial crisis (search for similar items in EconPapers)
Date: 2017
References: Add references at CitEc
Citations:

Downloads: (external link)
http://redfame.com/journal/index.php/aef/article/view/2513/2646 (application/pdf)
http://redfame.com/journal/index.php/aef/article/view/2513 (text/html)

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:rfa:aefjnl:v:4:y:2017:i:4:p:160-168

Access Statistics for this article

More articles in Applied Economics and Finance from Redfame publishing Contact information at EDIRC.
Bibliographic data for series maintained by Redfame publishing ().