The Empirical Performance Of The Stochastic Volatility Model In Pricing Ftse 100 Index Options
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Empirical Performance of Option Pricing Models with Stochastic Local Volatility
| Author | : Greg Orosi |
| Publisher | : |
| Total Pages | : 16 |
| Release | : 2014 |
| Genre | : |
| ISBN | : |
We examine the empirical performance of several stochastic local volatility models that are the extensions of the Heston stochastic volatility model. Our results indicate that the stochastic volatility model with quadratic local volatility significantly outperforms the stochastic volatility model with CEV type local volatility. Moreover, we compare the performance of these models to several other benchmarks and find that the quadratic local volatility model compares well to the best performing option pricing models reported in the current literature for European-style S&P500 index options. Our results also indicate that the model with quadratic local volatility reproduces the characteristics of the implied volatility surface more accurately than the Heston model. Finally, we demonstrate that capturing the shape of the implied volatility surface is necessary to price binary options accurately.
Pricing Ftse 100 Index Options Under Stochastic Volatility
| Author | : Yueh-Neng Lin |
| Publisher | : |
| Total Pages | : 30 |
| Release | : 1999 |
| Genre | : |
| ISBN | : |
Results from the ARCH/GARCH literature and studies of implied volatility clearly show that volatility changes over time. This paper investigates the improvement in pricing of FTSE 100 index options from taking into account stochastic volatility. The major tool for this analysis is Heston?s (1993) stochastic volatility option pricing formula, which allows for systematic volatility risk and arbitrary correlation between underlying returns and volatility. The relation between actual and implied volatilities is also investigated using the approach of Bates (1996). The results reveal significant evidence of stochastic volatility implicit in option prices, suggesting that this phenomenon is essential to improving the performance of the Black-Scholes model for FTSE 100 index options. Given the assumption that the volatility risk premium is proportional to the spot volatility level, the compensation for volatility risk, in absolute terms, is significant. However, from the standpoint of internal consistency, the study finds that the estimated volatility of the time series of implied instantaneous variances is less than the variability of variance implicit in index option contracts. This indicates the presence of residual model misspecification.
Empirical Studies on Volatility in International Stock Markets
| Author | : Eugenie M.J.H. Hol |
| Publisher | : Springer Science & Business Media |
| Total Pages | : 168 |
| Release | : 2013-03-09 |
| Genre | : Business & Economics |
| ISBN | : 147575129X |
Empirical Studies on Volatility in International Stock Markets describes the existing techniques for the measurement and estimation of volatility in international stock markets with emphasis on the SV model and its empirical application. Eugenie Hol develops various extensions of the SV model, which allow for additional variables in both the mean and the variance equation. In addition, the forecasting performance of SV models is compared not only to that of the well-established GARCH model but also to implied volatility and so-called realised volatility models which are based on intraday volatility measures. The intended readers are financial professionals who seek to obtain more accurate volatility forecasts and wish to gain insight about state-of-the-art volatility modelling techniques and their empirical value, and academic researchers and students who are interested in financial market volatility and want to obtain an updated overview of the various methods available in this area.
Volatility Surface and Term Structure
| Author | : Kin Keung Lai |
| Publisher | : Routledge |
| Total Pages | : 113 |
| Release | : 2013-09-11 |
| Genre | : Business & Economics |
| ISBN | : 1135006989 |
This book provides different financial models based on options to predict underlying asset price and design the risk hedging strategies. Authors of the book have made theoretical innovation to these models to enable the models to be applicable to real market. The book also introduces risk management and hedging strategies based on different criterions. These strategies provide practical guide for real option trading. This book studies the classical stochastic volatility and deterministic volatility models. For the former, the classical Heston model is integrated with volatility term structure. The correlation of Heston model is considered to be variable. For the latter, the local volatility model is improved from experience of financial practice. The improved local volatility surface is then used for price forecasting. VaR and CVaR are employed as standard criterions for risk management. The options trading strategies are also designed combining different types of options and they have been proven to be profitable in real market. This book is a combination of theory and practice. Users will find the applications of these financial models in real market to be effective and efficient.
The Empirical Performance of a Two-factor Stochastic Volatility Model on Single Stock Options in Times of Crisis
| Author | : Lars Lange |
| Publisher | : |
| Total Pages | : |
| Release | : 2013 |
| Genre | : |
| ISBN | : |
Die vorliegende Thesis untersucht die empirische Leistung von verschiedenen Modellen zur Berechnung von Optionspreisen. Dabei werden das Black & Scholes sowie vier komplexere Modelle mit einem besonderen Fokus auf stochastischer Volatilität detailliert vorgestellt. Anschliessend werden diese Modelle mit Optionsdaten von 2006 bis 2009 empirisch getestet.
The Performance of Popular Stochastic Volatility Option Pricing Models During the Subprime Crisis
| Author | : Thibaut Moyaert |
| Publisher | : |
| Total Pages | : 21 |
| Release | : 2016 |
| Genre | : |
| ISBN | : |
Using daily options prices on the Eurostoxx 50 stock index over the whole year 2008, we compare the performance of three popular stochastic volatility models (Heston, 1993; Bates, 1996; Heston and Nandi, 2'007, in addition to the traditional Black-Scholes model and a proprietary trading desk model. We show that the most consistent in-sample and out-of-sample statistical performance is obtained for the internal model. However, the Bates model seems to be better suited to short term (out-of-the-money) options while the Heston model seems to perform better for medium or long term options. In terms of hedging performance, the Heston and Nandi model exhibits the best average, albeit most volatile, result and the Heston model outperforms the Black and Scholes model in terms of hedging errors, mainly for option contracts that mature in-the-money.
Application of Stochastic Volatility Models in Option Pricing
| Author | : Pascal Debus |
| Publisher | : GRIN Verlag |
| Total Pages | : 59 |
| Release | : 2013-09-09 |
| Genre | : Business & Economics |
| ISBN | : 3656491941 |
Bachelorarbeit aus dem Jahr 2010 im Fachbereich BWL - Investition und Finanzierung, Note: 1,2, EBS Universität für Wirtschaft und Recht, Sprache: Deutsch, Abstract: The Black-Scholes (or Black-Scholes-Merton) Model has become the standard model for the pricing of options and can surely be seen as one of the main reasons for the growth of the derivative market after the model ́s introduction in 1973. As a consequence, the inventors of the model, Robert Merton, Myron Scholes, and without doubt also Fischer Black, if he had not died in 1995, were awarded the Nobel prize for economics in 1997. The model, however, makes some strict assumptions that must hold true for accurate pricing of an option. The most important one is constant volatility, whereas empirical evidence shows that volatility is heteroscedastic. This leads to increased mispricing of options especially in the case of out of the money options as well as to a phenomenon known as volatility smile. As a consequence, researchers introduced various approaches to expand the model by allowing the volatility to be non-constant and to follow a sto-chastic process. It is the objective of this thesis to investigate if the pricing accuracy of the Black-Scholes model can be significantly improved by applying a stochastic volatility model.
