On Practitioners Closed-Form GARCH Option Pricing
Date
Authors
Mozumder, S
Frijns, B
Talukdar, B
Kabir, MH
Supervisor
Item type
Journal Article
Degree name
Journal Title
Journal ISSN
Volume Title
Publisher
Elsevier BV
Abstract
This paper proposes a practitioner version of Heston and Nandi's (2000) (HN) model, which we term the Practitioner's Heston Nandi, or PHN model. We compare the option pricing and hedging performance of the PHN model vis-à-vis the HN model. Instead of using a one-period ahead volatility forecast for all options used in calibrations at any given time, the PHN model proposes using forward-looking ad-hoc volatilities (implied by market option prices) for each individual option and maturity in calibration and hedging. Since the proposed PHN model uses only option price data, it renders historical stock price data redundant, cutting the data requirement in derivative valuation. We employ options traded at CBOE for the period January 1, 2016 to December 31, 2018 and show that the proposed PHN model yields quick calibration and significantly improves pricing and hedging for European-style options.Description
Keywords
38 Economics, 3502 Banking, Finance and Investment, 3801 Applied Economics, 35 Commerce, Management, Tourism and Services, 1501 Accounting, Auditing and Accountability, 1502 Banking, Finance and Investment, 1801 Law, Finance, 3501 Accounting, auditing and accountability, 3502 Banking, finance and investment, 3801 Applied economics
Source
International Review of Financial Analysis, ISSN: 1057-5219 (Print), Elsevier BV, 94, 103296-103296. doi: 10.1016/j.irfa.2024.103296
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Rights statement
© 2024 The Authors. Published by Elsevier Inc. This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/).