Testing option pricing models: complete and incomplete markets
Olesia Verchenko ()
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Olesia Verchenko: Kyiv School of Economics, Kyiv Economic Institute
No 38, Discussion Papers from Kyiv School of Economics
This paper examines the empirical performance of several complete and incomplete market models of stock price dynamics using S&P 500 options and stock market data. The main contribution of this work is that it suggests and implements an empirical approach to estimating a complete model with uncertain volatility, and then judges it against other popular option pricing processes. The performance of alternative models is evaluated from four perspectives: (1) in-sample fit to stock returns data, (2) in-sample fit to options data, (3) consistency of physical and risk-neutral parameter estimates and (4) out-of-sample option pricing. Overall, the complete model with uncertain volatility is found to .t the data much better than models with constant and price-level-dependent volatilities, and the variance gamma process, and its performance is comparable to that of a stochastic volatility model.
Keywords: Option pricing; complete and incomplete markets; stochastic volatility (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk, nep-mst, nep-ore and nep-rmg
Note: Submitted to Journal of Derivatives
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http://repec.kse.org.ua/pdf/KSE_dp38.pdf May 2011 (application/pdf)
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Persistent link: https://EconPapers.repec.org/RePEc:kse:dpaper:38
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