Stochastic Volatility and the Informational Content of Option Prices: Empirical Analysis

Antonio Mele and Fabio Fornari ()

No 912, Computing in Economics and Finance 1999 from Society for Computational Economics

Abstract: We compare the state-price density that is implied by the cross-section of options prices with the corresponding density of the underlying asset price that is derived from an equilibrium model with Markovian stochastic volatility. If the data-generating process is of the stochastic volatility type and if options are correctly priced, the two densities should be identical. Such work has been motivated by the negative results obtained by Aðt-Sahalia, Wang and Yard (1998) in the case of a simple, complete-markets setting in which the volatility of the underlying asset price only depended on the underlying asset price.

Date: 1999-03-01
New Economics Papers: this item is included in nep-ets and nep-fin
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