The pricing of options on WIG20 using GARCH models

Szymon Kaminski ()

No 2013-06, Working Papers from Faculty of Economic Sciences, University of Warsaw

Abstract: In this paper the application of several option pricing models has been tested on the basis of options traded on the Warsaw Stock Exchange. At first, theoretical option prices have been calculated according to the models chosen. Next, the models have been tested by comparing their option prices estimates to prices observed on the market. The models chosen are: a few alternative versions of the Duan (1995) GARCH Option Pricing Model, and two versions of the model by Black (1976). A separate section is devoted to the impact of the implied dividend yield on prices of options. The study covers a period from January 2006 to March 2012. Results show that the most accurate models are the Black model with a volatility term structure, and the Duan GARCH Option Pricing Model with implied dividend yield and Student's T random errors.

Keywords: GARCH models; Duan methodology; Black model; implied volatility; option pricing (search for similar items in EconPapers)
JEL-codes: C15 C53 G17 G23 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2013
New Economics Papers: this item is included in nep-ore
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http://www.wne.uw.edu.pl/inf/wyd/WP/WNE_WP91.pdf First version, 2013 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:war:wpaper:2013-06

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