Bayesian option pricing using asymmetric GARCH
Luc Bauwens () and
Michel Lubrano ()
No 1997059, CORE Discussion Papers from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)
This paper shows how one can compute option prices from a Bayesian inference viewpoint, using an econometric model for the dynamics of the return and of the volatility of the underlying asset. The proposed evaluation of an option is the predictive expectation of its payoff function. The predictive distribution of this function provides a natural metric with respect to which the predictive option price, or other option evaluations, can be gauged. The proposed method is compared to the Black and Scholes evaluation, in which a predictive mean volatility is plugged, but which does not provide a natural metric. The methods are illustrated using an asymmetric GARCH model with a data set on a stock index in Brussels. The persistence of the volatility process is linked to the prediction horizon and to the option maturity.
Keywords: Bayesian; GARCH; option pricing; simulation (search for similar items in EconPapers)
JEL-codes: C11 C15 C22 G13 (search for similar items in EconPapers)
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Working Paper: Bayesian Option Pricing Using Asymmetric GARCH (1997)
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Persistent link: https://EconPapers.repec.org/RePEc:cor:louvco:1997059
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