Option valuation with conditional heteroskedasticity and nonnormality

Review of Financial Studies

Volumn 23, Issue 5, 2010, Pages 2139-2183

  Christoffersen, Peter ^a   Elkamhi, Redouane ^b   Feunou, Bruno ^c   Jacobs, Kris ^a,d,e  

^a MCGILL UNIVERSITY   (Canada)

^b UNIVERSITY OF IOWA   (United States)

^c DUKE UNIVERSITY   (United States)

^d UNIVERSITY OF HOUSTON   (United States)

^e TILBURG UNIVERSITY   (Netherlands)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 77951233374     PISSN: 08939454     EISSN: 14657368     Source Type: Journal    
DOI: 10.1093/rfs/hhp078     Document Type: Article

References (81)

1. Amin, K., and V. Ng. 1993. ARCH Processes and Option Valuation. Working Paper, University of Michigan.
2. Bakshi, C., C. Cao, and Z. Chen. 1997. Empirical Performance of Alternative Option Pricing Models. Journal of Finance 52:2003-2049 (Pubitemid 127344421)
3. Barone-Adesi, G., R. Engle, and L. Mancini. 2008. A GARCH Option Pricing Model in Incomplete Markets. Review of Financial Studies 21:1223-1258
4. Bates, D. 1996. Jumps and Stochastic Volatility: Exchange Rate Processes Implicit in Deutsche Mark Options. Review of Financial Studies 9:69-107. (Pubitemid 126408185)
5. Bates, D. 2000. Post-'87 Crash Fears in the S&P 500 Futures Option Market. Journal of Econometrics 94:181-238.
6. Bates, D. 2003. Empirical Option Pricing: A Retrospection. Journal of Econometrics 116:387-404.
7. Bernardo, A., and O. Ledoit. 2000. Gain, Loss, and Asset Pricing. Journal of Political Economy 108:144-172
8. Bick, A. 1990. On Viable Diffusion Price Processes of the Market Portfolio. Journal of Finance 45:673-689
9. Bjork, T., and I. Slinko. 2006. Towards a General Theory of Good-Deal Bounds. Review of Finance 10:221-260 (Pubitemid 43822949)
10. Black, F., and M. Scholes. 1973. The Pricing of Options and Corporate Liabilities. Journal of Political Economy 81:637-659
11. Bollerslev, T. 1986. Generalized Autoregressive Conditional Heteroskedasticity. Journal of Econometrics 31:307-327
12. Bollerslev, T., R. Chou, and K. Kroner. 1992. ARCH Modelling in Finance: A Review of the Theory and Empirical Evidence. Journal of Econometrics 52:5-59.
13. Bollerslev, T.,M. Gibson, and H. Zhou. Forthcoming. Dynamic Estimation of Volatility Risk Premia and Investor Risk Aversion from Option-Implied and Realized Volatilities. Journal of Econometrics.
14. Bollerslev, T., and H. O. Mikkelsen. 1996. Long-Term Equity Anticipation Securities and StockMarket Volatility Dynamics. Journal of Econometrics 92:75-99. (Pubitemid 129593208)
15. Bondarenko, O., and I. Longarela. 2004. Benchmark Good Deal Bounds: An Application to Stochastic Volatility Models of Option Pricing. Working Paper, Stockholm School of Economics.
16. Brennan, M. 1979. The Pricing of Contingent Claims in Discrete-Time Models. Journal of Finance 34:53-68.
17. Broadie, M., M. Chernov, and M. Johannes. 2007. Model Specification and Risk Premia: Evidence from Futures Options. Journal of Finance 62:1453-1490
18. Buhlmann, H., F. Delbaen, P. Embrechts, and A. Shiryaev. 1996. No-Arbitrage, Change of Measure and Conditional Esscher Transforms. CWI Quarterly 9:291-317.
19. Buhlmann, H., F. Delbaen, P. Embrechts, and A. Shiryaev. 1998. On Esscher Transforms in Discrete Finance Models. ASTIN Bulletin 28:171-186
20. Camara, A. 2003. A Generalization of the Brennan-Rubinstein Approach for the Pricing of Derivatives. Journal of Finance 58:805-819 (Pubitemid 37311722)
21. Carr, P., and L. Wu. 2004. Time-Changed Levy Processes and Option Pricing. Journal of Financial Economics 17:113-141 (Pubitemid 38033335)
22. Carr, P., and L. Wu. 2009. Variance Risk Premia. Review of Financial Studies 22:1311-1341
23. Christoffersen, P., S. Heston, and K. Jacobs. 2006. Option Valuation with Conditional Skewness. Journal of Econometrics 131:253-284 (Pubitemid 43295776)
24. Christoffersen, P., and K. Jacobs. 2004. Which GARCH Model for Option Valuation? Management Science 50:1204-1221
25. Cochrane, J., and J. Saa-Requejo. 2000. Beyond Arbitrage: Good-Deal Asset Price Bounds in Incomplete Markets. Journal of Political Economy 108:79-119. (Pubitemid 30199843)
26. Constantinides, G., J. Jackwerth, and S. Perrakis. 2009. Mispricing of S&P 500 Index Options. Review of Financial Studies 22:1247-1278
27. Constantinides, G., and S. Perrakis. 2002. Stochastic Dominance Bounds on Derivative Prices in a Multiperiod Economy with Proportional Transaction Costs. Journal of Economic Dynamics and Control 26:1323-1352
28. Constantinides, G., and S. Perrakis. 2007. Stochastic Dominance Bounds on American Option Prices in Markets with Frictions. Review of Finance 11:71-115.
29. Corradi, V. 2000. Reconsidering the Continuous-Time Limit of the GARCH(1,1) Process. Journal of Econometrics 96:145-153
30. Cox, J., and S. Ross. 1976. The Valuation of Options for Alternative Stochastic Processes. Journal of Financial Economics 3:145-166
31. Cox, J., S. Ross, and M. Rubinstein. 1979. Option Pricing: A Simplified Approach. Journal of Financial Economics 7:229-264
32. Diebold, F., and J. Lopez. 1995. Modeling Volatility Dynamics. In K. Hoover (ed.), Macroeconometrics: Developments, Tensions and Prospects, pp. 427-466 Boston, MA: Kluwer Academic Press.
33. Duan, J.-C. 1995. The GARCH Option Pricing Model. Mathematical Finance 5:13-32.
34. Duan, J.-C. 1997. Augmented GARCH(p, q) Process and Its Diffusion Limit. Journal of Econometrics 79:97-127. (Pubitemid 127403959)
35. Duan, J.-C. 1999. Conditionally Fat-Tailed Distributions and the Volatility Smile in Options. Working Paper, University of Toronto.
36. Duan, J.-C., P. Ritchken, and Z. Sun. 2005. Jump Starting GARCH: Pricing and Hedging Options with Jumps in Returns and Volatilities. Working Paper, University of Toronto.
37. Engle, R. 1982. Autoregressive Conditional Heteroskedasticity with Estimates of the Variance of UK Inflation. Econometrica 50:987-1008.
38. Engle, R., D. M. Lilien, and R. P. Robins. 1987. Estimating Time Varying Risk Premia in the Term Structure: The ARCH-M Model. Econometrica 55:391-407.
39. Eraker, B. 2004. Do Stock Prices and Volatility Jump? Reconciling Evidence from Spot and Option Prices. Journal of Finance 59:1367-1403 (Pubitemid 38799766)
40. Eraker, B., M. Johannes, and N. Polson. 2003. The Impact of Jumps in Volatility and Returns. Journal of Finance 58:1269-1300 (Pubitemid 36639173)
41. Esscher, F. 1932. On the Probability Function in the Collective Theory of Risk. Skandinavisk Aktuarietidskrift 15:175-195
42. Feller, W. 1968. An Introduction to Probability Theory and Its Applications. New York: John Wiley & Sons.
43. Feunou, B., and R. Tedongap. 2009. A Multifactor Stochastic Volatility Model with Time-Varying Conditional Skewness. Working Paper, Department of Economics, Duke University.
44. Foster, D. P., and D. B. Nelson. 1996. Continuous Record Asymptotics for Rolling Sample Variance Estimators. Econometrica 64:139-174
45. French, K., G.W. Schwert, and R. Stambaugh. 1987. Expected Stock Returns and Volatility. Journal of Financial Economics 19:3-30.
46. Garcia, R., and E. Renault. 1998. A Note on Hedging in ARCH-type Option Pricing Models. Mathematical Finance 8:153-161
47. Gerber, H., and E. Shiu. 1994. Option Pricing by Esscher Transforms. Transactions of the Society of Actuaries 46:99-191.
48. Glosten, L. R., R. Jagannathan, and D. Runkle. 1993. On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks. Journal of Finance 48:1779-1801
49. Ghysels, E., A. Harvey, and E. Renault. 1995. Stochastic Volatility. In G. S. Maddala and C. R. Rao (eds.), Handbook of Statistics 14, Statistical Methods in Finance. Amsterdam: North Holland.
50. Gourieroux, C., and A. Monfort. 2007. Econometric Specification of Stochastic Discount Factor Models. Journal of Econometrics 136:509-530 (Pubitemid 44879755)
51. Harrison, M., and D. Kreps. 1979. Martingales and Arbitrage in Multi-period Securities Markets. Journal of Economic Theory 20:381-408.
52. Harrison, M., and S. Pliska. 1981. Martingales and Stochastic Integrals in the Theory of Continuous Trading. Stochastic Processes and Their Applications 11:215-260
53. He, H., and H. Leland. 1993. On Equilibrium Asset Price Processes. Review of Financial Studies 6:593-617.
54. Heston, S. 1993a. A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options. Review of Financial Studies 6:327-343
55. Heston, S. 1993b. Invisible Parameters in Option Prices. Journal of Finance 48:933-947
56. Heston, S. 2004. Option Valuation with Infinitely Divisible Distributions. Quantitative Finance 4:515-524 (Pubitemid 40111713)
57. Heston, S., and S. Nandi. 2000. A Closed-Form GARCH Option Pricing Model. Review of Financial Studies 13:585-626.
58. Huang, J.-Z., and L. Wu. 2004. Specification Analysis of Option Pricing Models Based on Time-Changed Levy Processes. Journal of Finance 59:1405-1439 (Pubitemid 38799767)
59. Jacod, J., and A. Shiryaev. 1998. Local Martingales and the Fundamental Asset Pricing Theorems in the Discrete-Time Case. Finance and Stochastics 2:259-273 (Pubitemid 128071820)
60. Karatzas, I., and S. Shreve. 1998. Methods of Mathematical Finance. New York: Springer.
61. Le, A., K. Singleton, and Q. Dai. Forthcoming. Discrete-Time Dynamic Term StructureModels with Generalized Market Prices of Risk. Review of Financial Studies.
62. Levy, H. 1985. Upper and Lower Bounds of Put and Call Option Value: Stochastic Dominance Approach. The Journal of Finance 40:1197-1217
63. Lukacs, E. 1970. Characteristic Functions. London: Griffin.
64. Madan, D., and E. Seneta. 1990. The Variance Gamma Model from Share Market Returns. Journal of Business 63:511-524
65. Maheu, J., and T. McCurdy. 2004. News Arrival, Jump Dynamics and Volatility Components for Individual Stock Returns. Journal of Finance 59:755-793 (Pubitemid 38483895)
66. Nelson, D. 1991. Conditional Heteroskedasticity in Asset Returns: A New Approach. Econometrica 59:347-370
67. Nelson, D. 1996. Asymptotically Optimal Smoothing with ARCH Models. Econometrica 64:561-573 (Pubitemid 126464415)
68. Nelson, D., and D. Foster. 1994. Asymptotic Filtering Theory for Univariate ARCH Models. Econometrica 62:1-41.
69. Oancea, I., and S. Perrakis. 2007. Stochastic Dominance and Option Pricing in Discrete and Continuous Time: An Alternative Paradigm. Working Paper, Concordia University.
70. Pan, J. 2002. The Jump-Risk Premia Implicit in Options: Evidence from an Integrated Time-Series Study. Journal of Financial Economics 63:3-50. (Pubitemid 39659497)
71. Perrakis, S. 1986. Option Bounds in Discrete Time: Extensions and the Pricing of the American Put. Journal of Business 59:119-141
72. Perrakis, S., and P. Ryan. 1984. Option Bounds in Discrete Time. Journal of Finance 39:519-525
73. Ritchken, P. 1985. On Option Pricing Bounds. Journal of Finance 40:1219-1233
74. Ritchken, P., and S. Kuo. 1988. Option Bounds with Finite Revision Opportunities. Journal of Finance 43:301-308
75. Ritchken, P., and R. Trevor. 1999. Option Pricing under GARCH and Stochastic Volatility. Journal of Finance 54:377-402.
76. Rubinstein, M. 1976. The Valuation of Uncertain Income Streams and the Pricing of Options. Bell Journal of Economics 7:407-425
77. Satchell, S., and A. Timmermann. 1996. Option Pricing with GARCH and Systematic Consumption Risk. Derivatives Use, Trading & Regulation, Part II 1:353-367
78. Schroder, M. 2004. Risk Neutral Parameter Shifts and Derivatives Pricing in Discrete Time. Journal of Finance 59:2375-2402
79. Schwert, G. W. 1989. Why Does Stock Market Volatility Change over Time? Journal of Finance 44:1115-1153
80. Shiryaev, A. 1999. Essentials of Stochastic Finance: Facts, Models, Theory. Singapore and River Edge, NJ: World Scientific.
81. Siu, T. K., H. Tong, and H. Yang. 2004. On Pricing Derivatives under GARCH Models: A Dynamic Gerber-Shiu Approach. North American Actuarial Journal 8:17-31.