The performance of popular stochastic volatility option pricing models during the subprime crisis

Thibaut Moyaert and Mikael Petitjean

Applied Financial Economics, 2011, vol. 21, issue 14, 1059-1068

Abstract: Using daily options prices on the Eurostoxx 50 stock index over the whole year 2008, we compare the performance of three popular Stochastic Volatility (SV) models (Heston, 1993; Bates, 1996; Heston and Nandi, 2000), in addition to the traditional Black-Scholes model and a proprietary trading desk model. We show that the most consistent in-sample and out-of-sample statistical performance is obtained for the internal model. However, the Bates model seems to be better suited to Short Term (ST, out-of-the-money) options while the Heston model seems to perform better for medium or Long Term (LT) options. In terms of hedging performance, the Heston and Nandi model exhibits the best average, albeit most volatile, result and the Heston model outperforms the Black-Scholes model in terms of hedging errors, mainly for option contracts that mature in-the-money.

Keywords: Heston; stochastic volatility; out-of-sample; delta hedge; forecasting (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (4)

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DOI: 10.1080/09603107.2011.562161

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