Journal ArticleDOI
The garch option pricing model
TLDR
In this paper, an option pricing model and its corresponding delta formula were developed in the context of the generalized autoregressive conditional heteroskedastic (GARCH) asset return process.Abstract:
This article develops an option pricing model and its corresponding delta formula in the context of the generalized autoregressive conditional heteroskedastic (GARCH) asset return process. the development utilizes the locally risk-neutral valuation relationship (LRNVR). the LRNVR is shown to hold under certain combinations of preference and distribution assumptions. the GARCH option pricing model is capable of reflecting the changes in the conditional volatility of the underlying asset in a parsimonious manner. Numerical analyses suggest that the GARCH model may be able to explain some well-documented systematic biases associated with the Black-Scholes model.read more
Citations
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Book ChapterDOI
5 Stochastic volatility
TL;DR: The Black-Scholes model predicts a flat term structure of volatilities as mentioned in this paper, which is typically upward sloping when short term volatility is low and the reverse when they are high.
Journal ArticleDOI
Alternative models for stock price dynamics
TL;DR: In this article, the role of various volatility specifications, such as multiple stochastic volatility (SV) factors and jump components, in appropriate modeling of equity return distributions is evaluated.
Journal ArticleDOI
Monte Carlo methods for security pricing
TL;DR: In this article, the authors discuss some of the recent applications of the Monte Carlo method to security pricing problems, with emphasis on improvements in efficiency, and describe the use of deterministic low-discrepancy sequences, also known as quasi-Monte Carlo methods, for the valuation of complex derivative securities.
Journal ArticleDOI
Predicting Volatility in the Foreign Exchange Market
TL;DR: This article examined the information content and predictive power of implied standard deviations (ISDs) derived from Chicago Mercantile Exchange options on foreign currency futures, and found that statistical time-series models, even when given the advantage of "ex post" parameter estimates, are outperformed by ISDs.
References
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Journal ArticleDOI
The Pricing of Options and Corporate Liabilities
Fischer Black,Myron S. Scholes +1 more
TL;DR: In this paper, a theoretical valuation formula for options is derived, based on the assumption that options are correctly priced in the market and it should not be possible to make sure profits by creating portfolios of long and short positions in options and their underlying stocks.
Journal ArticleDOI
Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation
TL;DR: In this article, a new class of stochastic processes called autoregressive conditional heteroscedastic (ARCH) processes are introduced, which are mean zero, serially uncorrelated processes with nonconstant variances conditional on the past, but constant unconditional variances.
Journal ArticleDOI
Generalized autoregressive conditional heteroskedasticity
Tim Bollerslev,Tim Bollerslev +1 more
TL;DR: In this paper, a natural generalization of the ARCH (Autoregressive Conditional Heteroskedastic) process introduced in 1982 to allow for past conditional variances in the current conditional variance equation is proposed.
Journal ArticleDOI
Conditional heteroskedasticity in asset returns: a new approach
TL;DR: In this article, an exponential ARCH model is proposed to study volatility changes and the risk premium on the CRSP Value-Weighted Market Index from 1962 to 1987, which is an improvement over the widely-used GARCH model.
Book
Theory of rational option pricing
TL;DR: In this paper, the authors deduced a set of restrictions on option pricing formulas from the assumption that investors prefer more to less, which are necessary conditions for a formula to be consistent with a rational pricing theory.