Pricing Nikkei 225 Options Using Realized Volatility

Masato Ubukata and Toshiaki Watanabe

Global COE Hi-Stat Discussion Paper Series from Institute of Economic Research, Hitotsubashi University

Abstract: This article examines option pricing performance using realized volatilities with or without handling microstructure noise, non-trading hours and large jumps. The dynamics of realized volatility is specified by ARFIMA(X) and HAR(X) models. Main results using put options on the Nikkei 225 index are: (1) ARFIMAX model performs best, (2) the Hansen and Lunde (2005a) adjustment for non-trading hours improves the performance, (3) methods for reducing microstructure noise-induced bias yield better performance, while if the Hansen-Lunde adjustment is used, the other methods are not necessarily needed and (4) the performance is unaffected by removing large jumps from realized volatility.

Keywords: microstructure noise; Nikkei 225 stock index; non-trading hours; option pricing; realized volatility (search for similar items in EconPapers)
JEL-codes: C13 C22 C52 (search for similar items in EconPapers)
Date: 2013-01
New Economics Papers: this item is included in nep-fmk and nep-mst
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Persistent link: https://EconPapers.repec.org/RePEc:hst:ghsdps:gd12-273

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