Exploring option pricing and hedging via volatility asymmetry

Isabel Casas ()
Authors registered in the RePEc Author Service: Helena Veiga

DES - Working Papers. Statistics and Econometrics. WS from Universidad Carlos III de Madrid. Departamento de Estadística

Abstract: This paper evaluates the application of two well-known asymmetric stochastic volatility (ASV) models to option price forecasting and dynamic delta hedging. They are specied in discrete time in contrast to the classical stochastic volatility (SV) models used in option pricing. There is some related literature, but little is known about the empirical implications of volatility asymmetry on option pricing. The objectives of this paper are to estimate ASV option pricing models using a Bayesian approach unknown in this type of literature, and to investigate the e ect of volatility asymmetry on option pricing for di erent size equity sectors and periods of volatility. Using the S&P MidCap 400 and S&P 500 European call option quotes, results show that volatility asymmetry benets the accuracy of option price forecasting and hedging cost e ectiveness in the large-cap equity sector. However, asymmetric SV models do not improve the option price forecasting and dynamic hedging in the mid-cap equity sector.

Keywords: Delta; Hedging; Stochastic; Volatility; Option; Pricing; Volatility; Asymmetry (search for similar items in EconPapers)
JEL-codes: C22 C51 C58 (search for similar items in EconPapers)
Date: 2019-03-19
New Economics Papers: this item is included in nep-cfn
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Related works:
Journal Article: Exploring Option Pricing and Hedging via Volatility Asymmetry (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:cte:wsrepe:28234

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