An application of closed-form GARCH option-pricing model on FTSE 100 option and volatility

YongChern Su, MingDa Chen and HanChing Huang

Applied Financial Economics, 2010, vol. 20, issue 11, 899-910

Abstract: Many researches indicate that the Black-Scholes (BS) option-pricing model demonstrates systematic biases due to some unreasonable assumptions. In practice, implied volatilities tend to differ across exercise prices and time to maturities. To solve the problem, Heston and Nandi (HN) (2000) develop closed-form Generalized Autoregressive Conditional Heteroscedasticity (HN-GARCH) model. In this study, we apply their model on Financial Time Stock Exchange (FTSE) 100 index option. As a benchmark, we employ the ad hoc BS model which uses a separate implied volatility for each option to fit the smirk/smile in implied volatilities. The test finds that the HN GARCH has smaller valuation errors than the ad hoc BS model.

Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/09603101003652417 (text/html)
Access to full text is restricted to subscribers.

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:taf:apfiec:v:20:y:2010:i:11:p:899-910

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAFE20

DOI: 10.1080/09603101003652417

Access Statistics for this article

Applied Financial Economics is currently edited by Anita Phillips

More articles in Applied Financial Economics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().