An Empirical Examination of the Variance-Gamma Model for Foreign Currency Options

Elton A. Daal and Dilip B. Madan
Additional contact information
Elton A. Daal: University of New Orleans
Dilip B. Madan: University of Maryland

The Journal of Business, 2005, vol. 78, issue 6, 2121-2152

Abstract: We apply the variance-gamma (VG) option-pricing model to currency options. The model is a pure infinite-activity jump model. We examine whether and to what extent this new model can improve the pricing quality for currency options over the existing modified Black-Scholes model and the Merton jump-diffusion (JD) model. We find that the VG model yields better out-of-sample pricing performance than the modified Black-Scholes model or the JD model. In addition, a cross-entropy analysis shows that the VG model is more consistent with the general criterion of utility maximization and optimal portfolio selection.

Date: 2005
References: Add references at CitEc
Citations: View citations in EconPapers (27)

Downloads: (external link)
http://dx.doi.org/10.1086/497039 main text (application/pdf)
Access to the online full text or PDF requires a subscription.

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:ucp:jnlbus:v:78:y:2005:i:6:p:2121-2152

Access Statistics for this article

More articles in The Journal of Business from University of Chicago Press
Bibliographic data for series maintained by Journals Division ().