Not logged in.

Quick Search - Contribution

Contribution Details

Type Journal Article
Scope Discipline-based scholarship
Title A GARCH option pricing model with filtered historical simulation
Organization Unit
Authors
  • Giovanni Barone-Adesi
  • Robert F Engle
  • Loriano Mancini
Item Subtype Further Contribution (e.g. review article, editorial)
Refereed Yes
Status Published in final form
Language
  • English
Journal Title Review of Financial Studies
Publisher Oxford University Press
Geographical Reach international
ISSN 0893-9454
Volume 21
Number 3
Page Range 1223 - 1258
Date 2008
Abstract Text We propose a new method for pricing options based on GARCH models with filtered historical innovations. In an incomplete market framework, we allow for different distributions of historical and pricing return dynamics, which enhances the model's flexibility to fit market option prices. An extensive empirical analysis based on S&P 500 index options shows that our model outperforms other competing GARCH pricing models and ad hoc Black-Scholes models. We show that the flexible change of measure, the asymmetric GARCH volatility, and the nonparametric innovation distribution induce the accurate pricing performance of our model. Using a nonparametric approach, we obtain decreasing state-price densities per unit probability as suggested by economic theory and corroborating our GARCH pricing model. Implied volatility smiles appear to be explained by asymmetric volatility and negative skewness of filtered historical innovations.
Digital Object Identifier 10.1093/rfs/hhn031
Other Identification Number merlin-id:542
PDF File Download from ZORA
Export BibTeX
EP3 XML (ZORA)
Additional Information This is a pre-copy-editing, author-produced PDF of an article accepted for publication in The Review of Financial Studies following peer review. The definitive publisher-authenticated version Review of Financial Studies 21(3):1223-1258 is available online at: dx.doi.org/10.1093/rfs/hhn031.