Option Pricing with the Realized GARCH Model: An Analytical Approximation Approach

Zhuo Huang (), Tianyi Wang () and Peter Hansen

Journal of Futures Markets, 2017, vol. 37, issue 4, 328-358

Abstract: We derive a pricing formula for European options for the Realized GARCH framework based on an analytical approximation using an Edgeworth expansion for the density of cumulative return. Existing approximations in this context are based on a Gram–Charlier expansion while the proper Edgeworth expansion is more accurate. In relation to existing discrete‐time option pricing models with realized volatility, our model is log‐linear, non‐affine, with a flexible leverage effect. We conduct an extensive empirical analysis on S&P500 index options and the results show that our computationally fast formula outperforms competing methods in terms of pricing errors, both in‐sample and out‐of‐sample. © 2016 Wiley Periodicals, Inc. Jrl Fut Mark 37:328–358, 2017

Date: 2017
References: Add references at CitEc
Citations: View citations in EconPapers (27)

Downloads: (external link)
http://hdl.handle.net/

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:wly:jfutmk:v:37:y:2017:i:4:p:328-358

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0270-7314

Access Statistics for this article

Journal of Futures Markets is currently edited by Robert I. Webb

More articles in Journal of Futures Markets from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley Content Delivery ().