Empirical Assessment of an Intertemporal Option Pricing Model with Latent variables

René Garcia, Richard Luger and Eric Renault

Cahiers de recherche from Universite de Montreal, Departement de sciences economiques

Abstract: This paper assesses the empirical performance of an intertemporal option pricing model with latent variables which generalizes the Hull-White stochastic volatility formula. Using this generalized formula in an ad-hoc fashion to extract two implicit parameters and forecast next day S&P 500 option prices, we obtain similar pricing errors than with implied volatility alone as in the Hull-White case. When we specialize this model to an equilibrium recursive utility model, we show through simulations that option prices are more informative than stock prices about the structural parameters of the model. We also show that a simple method of moments with a panel of option prices provides good estimates of the parameters of the model. This lays the ground for an empirical assessment of this equilibrium model with S&P 500 option prices in terms of pricing errors.

Keywords: oion icing; stochastic discount factor; stochastic volatility; Black-Scholes imied volatility; smile effect; equilibrium oion icing (search for similar items in EconPapers)
JEL-codes: C10 G10 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2001
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://hdl.handle.net/1866/351 (application/pdf)

Related works:
Journal Article: Empirical assessment of an intertemporal option pricing model with latent variables (2003)
Working Paper: Empirical Assessment of an Intertemporal option Pricing Model with Latent variables (2001)
Working Paper: Empirical Assessment of an Intertemporal Option Pricing Model with Latent Variables (2000)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mtl:montde:2001-10

Access Statistics for this paper

More papers in Cahiers de recherche from Universite de Montreal, Departement de sciences economiques Contact information at EDIRC.
Bibliographic data for series maintained by Sharon BREWER ().