Martingalized Historical approach for Option Pricing

Christophe Chorro (), Dominique Guegan () and Florian Ielpo
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Christophe Chorro: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique
Dominique Guegan: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement

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Abstract: In a discrete time option pricing framework, we compare the empirical performance of two pricing methodologies, namely the affine stochastic discount factor (SDF) and the empirical martingale correction methodologies. Using a CAC 40 options dataset, the differences are found to be small: the higher order moment correction involved in the SDF approach may not be that essential to reduce option pricing errors. This paper puts into evidence the fact that an appropriate modelling under the historical measure associated with an adequate correction (that we call here a "martingale correction") permits to provide option prices which are close to market ones.

Keywords: Generalized Hyperbolic Distribution; Option pricing; Incomplete market; CAC40; Stochastic Discount Factor; Martingale Correction (search for similar items in EconPapers)
Date: 2010-03
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00437927v1
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Citations: View citations in EconPapers (15)

Published in Finance Research Letters, 2010, 7 (1), pp.24-28. ⟨10.1016/j.frl.2009.11.002⟩

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Related works:
Journal Article: Martingalized historical approach for option pricing (2010)
Working Paper: Martingalized Historical approach for Option Pricing (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:cesptp:halshs-00437927

DOI: 10.1016/j.frl.2009.11.002

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