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Ángel León (), Gabriele Fiorentini () and Gonzalo Rubio
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Ángel León: Universidad de Alicante
Gonzalo Rubio: Universidad del País Vasco

Working Papers. Serie AD from Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie)

Abstract: This paper examines the stochastic volatility model suggested by Heston (1993). We employ a time-series approach to estimate the model and we discuss the potential effects of time-varying skewness and kurtosis on the performance of the model. In particular, it is found that the model tends to overprice out-of-the-money calls and underprice in-the-money calls. It is also found that the daily volatility risk premium presents a quite volatile behavior over time; however, our evidence suggests that the volatility risk premium has a negligible impact on the pricing performance of Heston´s model.

Keywords: Stochastic; Volatility; Skewness; Kurtosis; Pricing. (search for similar items in EconPapers)
Pages: 42 pages
Date: 2000-11
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Working Paper: Short-term options with stochastic volatility: Estimation and empirical performance Downloads
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