Option pricing under linear autoregressive dynamics, heteroskedasticity, and conditional leptokurtosis

Christian Hafner and Helmut Herwartz

No 1999,58, SFB 373 Discussion Papers from Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes

Abstract: Daily returns of financial assets are frequently found to exhibit positive autocorrelation at lag 1. When specifying a linear AR(l) conditional mean, one may ask how this predictability affects option prices. We investigate the dependence of option prices on autoregressive dynamics under stylized facts of stock returns, i.e., conditional heteroskedasticity: leverage effect, and conditional leptokurtosis. Our analysis covers both a continuous and discrete time framework. The results suggest that a non-zero autoregression coefficient tends to increase the deviation of option prices from Black & Scholes prices caused by stochastic volatility.

Keywords: option pricing; autoregression; heteroskedasticity; GARCH; leverage effect; conditional leptokurtosis (search for similar items in EconPapers)
JEL-codes: C15 C22 G13 (search for similar items in EconPapers)
Date: 1999
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Option pricing under linear autoregressive dynamics, heteroskedasticity, and conditional leptokurtosis (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:sfb373:199958

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