Journal
JOURNAL OF ECONOMETRICS
Volume 131, Issue 1-2, Pages 253-284Publisher
ELSEVIER SCIENCE SA
DOI: 10.1016/j.jeconom.2005.01.010
Keywords
GARCH; out-of-sample; jumps; discrete-time model; continuous-time limit
Ask authors/readers for more resources
Index option prices differ systematically from Black-Scholes prices. Out-of-the-money put prices (and in-the-money call prices) are relatively high compared to the Black-Scholes price. Motivated by these empirical facts, we develop a new discrete-time dynamic model of stock returns with inverse Gaussian innovations. The model allows for conditional skewness as well as conditional heteroskedasticity and a leverage effect. We present all analytic option pricing formula consistent with this stock return dynamic. Ail extensive empirical test of the model using S&P500 index options shows that the new inverse Gaussian GARCH model's performance is superior to a standard existing nested model for out-of-the money Puts. (c) 2005 Elsevier B.V. All rights reserved.
Authors
I am an author on this paper
Click your name to claim this paper and add it to your profile.
Reviews
Recommended
No Data Available