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Researcher Lehnert, Thorsten
Source CiteSeerX
Content type Text
File Format PDF
Subject Domain (in DDC) Computer science, information & general works ♦ Data processing & computer science
Subject Keyword Stock Return ♦ Inconclusive Result ♦ Discrete-time Dynamic Model ♦ New Garch Option-pricing Model ♦ Thesis Empirical Evidence ♦ Well-documented Empirical Fact ♦ Black-scholes Price ♦ Near-the-money Option ♦ Garch Specification ♦ Pricing Error ♦ Index Option Price ♦ Previous Research ♦ Flexible Innovation Structure ♦ Relative Performance ♦ Dax Index Option ♦ Well-known Practitioner Black-scholes Model ♦ Gaussian Alternative ♦ Observed Volatility Smile ♦ Out-of-the Money Put Option ♦ Leptokurtic Innovation
Abstract It is a well-documented empirical fact that index option prices systematically differ from Black-Scholes prices. However, previous research provides inconclusive results whether the observed volatility smile could be explained by a discrete-time dynamic model of stock returns with skewed, leptokurtic innovations. The improvements in pricing errors are particularly pronounced for out-of-the money put options, while the models partly underperform a Gaussian alternative for near-the-money options. Motivated by theses empirical evidence, I develop a new GARCH option-pricing model with a more flexible innovation structure. In an application of the model to DAX index options, I test the relative performance of the approach against a standard nested GARCH specification and the well-known practitioners Black-Scholes model. I show that the performance of the truncated Lévy GARCH option pricing model is superior to existing approaches.
Educational Role Student ♦ Teacher
Age Range above 22 year
Educational Use Research
Education Level UG and PG ♦ Career/Technical Study
Learning Resource Type Thesis
Publisher Date 2004-01-01