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An empirical model of volatility of returns and option pricing

Joseph L. McCauley, Gemunu H. Gunaratne
2003 Physica A: Statistical Mechanics and its Applications  
of an option.  ...  Their model assumed a directed random motion for the returns and consequently a lognormal distribution of asset prices after a finite time. We point out two problems with their formulation.  ...  The other (JMC) is grateful to Chairman Larry Pinsky and the Econophysics Program at the University of Houston Department of Physics for encouragement including financial support, and to Kevin Bassler  ... 
doi:10.1016/s0378-4371(03)00589-2 fatcat:o2cgcugqtnh7nauu6zouw2vzw4

Empirical option pricing: a retrospection

David S. Bates
2003 Journal of Econometrics  
This article provides an overview and discussion of empirical option pricing research: how we test models, what we have learned, and what are some key issues.  ...  Some suggestions for future research are provided.  ...  The option pricing implications of standard stochastic volatility models are otherwise fairly close to an ad hoc Black-Scholes model with an updated volatility estimate, when the volatility process is  ... 
doi:10.1016/s0304-4076(03)00113-1 fatcat:rcl2n4n6tjgwfc3orzpwnkni5e

Econometric analysis of financial derivatives: An overview

Chia-Lin Chang, Michael McAleer
2015 Journal of Econometrics  
models, the fine structure of equity-index option dynamics, leverage and feedback effects in multifactor Wishart stochastic volatility for option pricing, option pricing with non-Gaussian scaling and  ...  models, the fine structure of equity-index option dynamics, leverage and feedback effects in multifactor Wishart stochastic volatility for option pricing, option pricing with non-Gaussian scaling and  ...  A feasible technique which allows for multivariate option pricing is presented, along with an empirical illustration of the daily returns of 30 components of the Dow Jones Industrial Index from 2001 to  ... 
doi:10.1016/j.jeconom.2015.02.026 fatcat:enocnw5r7jgejoojyblwlrwkgq

Page 33 of Economic Review - Federal Reserve Bank of Atlanta Vol. 81, Issue 3-6 [page]

1996 Economic Review - Federal Reserve Bank of Atlanta  
For both academic researchers and market practitioners, no consensus exists regarding the best specification of volatility for option pricing.  ...  On the other hand, there is evidence that some stochastic-volatility option pricing models provide better hedges than Black- Scholes, although for stochastic-volatility option pric- ing models and volatility-jump  ... 

Option Pricing under Stochastic Volatility and Trading Volume

Sadayuki Ono
2004 Social Science Research Network  
The model accounts well for time varying volatility smiles and term structures, and that out-of-sample price forecasts for a sample of call options are superior to the benchmark ad hoc procedure of plugging  ...  This paper presents a pricing formula for European options derived from a model in which changes in the underlying price and trading volumes are jointly determined by exogenous events.  ...  In this paper, motivated by a strong connection between trading volume and the volatility of stock returns, I employ trading volume as an instrument for return volatility to derive an option pricing formula  ... 
doi:10.2139/ssrn.676484 fatcat:gckhskp7bne6zpwajpxxwwxumy

Research on Pricing of Shanghai 50ETF Options Based on Fractal B-S Model and GARCH Model

Wanting Hu
2020 Modern Economy  
A reasonable option trading price will have certain guiding significance for option traders. Fractal B-S model and GARCH model are common pricing methods.  ...  At the same time, this paper calculates the pricing results of the BS option pricing method based on historical volatility, and compares the two options pricing results with the closing price of the option  ...  motion option pricing model to fit relevant actual data, and conducted an empirical test on the accuracy and effectiveness of the model.  ... 
doi:10.4236/me.2020.112031 fatcat:aweduxfoxjfhnb4jghfosvqlke

Stock Return Autocorrelation and Individual Equity Option Prices

Fei Fang
2021 Journal of Business Theory and Practice  
This study demonstrates empirically the impact of stock return autocorrelation on the prices of individual equity option.  ...  The option prices are characterized by the level and slope of implied volatility curves, and the stock return autocorrelation is measured by variance ratio and first-order serial return autocorrelation  ...  It is an empirical question, as to the extent that stock return autocorrelation affects option prices.  ... 
doi:10.22158/jbtp.v9n1p51 fatcat:uka75csssbbq7gh6xkl7kgrmii

On Forecasting Taiwanese Stock Index Option Prices: The Role of Implied Volatility Index

Jying-Nan Wang, Hung-Chun Liu, Lu-Jui Chen
2017 International Journal of Economics and Finance  
Empirical results firstly indicate that both the GARCH and GARCHVIX models consistently perform better than the historical volatility models for forecasting call value of TXO under different moneynesses  ...  We examine the price information on VIX to improve the predictive performance of GARCH model for valuing TAIEX stock index call options (TXO) over the period from January 2014 to May 2015.  ...  González-Rivera et al. (2004) investigate the forecasting performance of various volatility models for stock returns in terms of several loss functions (including an option pricing function) for which  ... 
doi:10.5539/ijef.v9n9p133 fatcat:klgpnhhg4nfv7ekr6fgafoihju

Analogy Making and the Structure of Implied Volatility Skew

Hammad Siddiqi
2013 Social Science Research Network  
The model provides a new explanation for the implied volatility skew puzzle and is consistent with empirical findings regarding leverage adjusted option returns.  ...  An analogy based call option pricing model is put forward.  ...  Empirical findings suggest that models with both stochastic volatility and jumps in returns fail to fully capture the empirical features of index returns and option prices (see Bakshi, Cao, and Chen (  ... 
doi:10.2139/ssrn.2305314 fatcat:cdhmekqihbepvnte4njonvdczm

Analogy Making and the Structure of Implied Volatility Skew

Hammad Siddiqi
2014 Social Science Research Network  
The model provides a new explanation for the implied volatility skew puzzle and is consistent with empirical findings regarding leverage adjusted option returns.  ...  An analogy based call option pricing model is put forward.  ...  Empirical findings suggest that models with both stochastic volatility and jumps in returns fail to fully capture the empirical features of index returns and option prices (see Bakshi, Cao, and Chen (  ... 
doi:10.2139/ssrn.2465738 fatcat:nugpuarw75bkvfvzbvvix2shqm

Expected Option Returns and the Structure of Jump Risk Premia

Nicole Branger, Alexandra Hansis, Christian Schlag
2009 Social Science Research Network  
The paper analyzes expected option returns in a model with stochastic volatility and jumps.  ...  A comparison with empirically documented returns shows that the ability of the model to explain these returns can differ significantly depending on the holding period and depending on whether we consider  ...  From an empirical point of view, we show, by comparing our simulation results to the option returns documented by Coval and Shumway (2001) and Broadie, Chernov, and Johannes (2008) , that models may  ... 
doi:10.2139/ssrn.1361739 fatcat:egjii2d5t5cijdbrlcomqnkkkq

Stock price dynamics and option valuations under volatility feedback effect

Juho Kanniainen, Robert Piché
2013 Physica A: Statistical Mechanics and its Applications  
Most importantly, our model predicts the negative effect of an increase in squared return volatility on the value of deep-in-the-money call options and, furthermore, attempts to explain the volatility  ...  We theoretically demonstrate a mechanism by which the market price of diffusion return risk, or an equity risk-premium, affects option prices and empirically illustrate how to identify that mechanism using  ...  of return risk is needed as an input to price options under our framework.  ... 
doi:10.1016/j.physa.2012.10.004 fatcat:wl2gcwiihbd7ldubmal7kltwp4

Forecasting Volatility and Pricing Option: An Empirical Evaluation of Indian Stock Market

Sunaina Kanojia, Neeraj Jain
2017 IOSR Journal of Business and Management  
In this way, present study provide rationale for using more advanced model for pricing options and cautious to the investors who use BS model to price options.  ...  The assessment of risk and determination of price of the asset class is primarily dependent on the volatility calculated for the class of asset.  ...  For Near ITM and OTM options, again IV Forecasting Volatility and Pricing Option: An Empirical Evaluation of Indian Stock Market Table6 : Table6 Root Mean Square Error by Moneywise for Option Price  ... 
doi:10.9790/487x-1907010108 fatcat:tnrbmrtyjfdajn566ia74ipyxq

Expected Option Returns and the Structure of Jump Risk Premia

Nicole Branger, Alexandra Hansis, Christian Schlag
2009 Social Science Research Network  
The paper analyzes expected option returns in a model with stochastic volatility and jumps.  ...  A comparison with empirically documented returns shows that the ability of the model to explain these returns can differ significantly depending on the holding period and depending on whether we consider  ...  From an empirical point of view, we show, by comparing our simulation results to the option returns documented by Coval and Shumway (2001) and Broadie, Chernov, and Johannes (2008) , that models may  ... 
doi:10.2139/ssrn.1340575 fatcat:hyktfvuhzvdkbmnialkvrecrx4

Volatility and Expected Option Returns

Guanglian Hu, Kris Jacobs
2015 Social Science Research Network  
We provide a theoretical and empirical analysis of the relationship between expected option returns and the volatility of the underlying securities.  ...  The expected return from holding a put option is an increasing function of the volatility of the underlying. These predictions are strongly supported by the data.  ...  For our benchmark results, we therefore rely on the classical Black-Scholes option pricing model to obtain an analytical expression for the expected return of holding an option to maturity.  ... 
doi:10.2139/ssrn.2695569 fatcat:iqrunwrtm5fwvbiucdiyb4bbyy
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