Implementing option pricing models when asset returns follow an autoregressive moving average process

International Review of Economics and Finance

Volumn 24, Issue , 2012, Pages 8-25

  Wang, Chou Wen ^a   Wu, Chin Wen ^b   Tzang, Shyh Weir ^c  

^a NATIONAL KAOHSIUNG UNIVERSITY OF APPLIED SCIENCES   (Taiwan)

^b NANHUA UNIVERSITY   (Taiwan)

^c ASIA UNIVERSITY   (Taiwan)

Author keywords

ARMA process; Martingale; Option pricing

Indexed keywords

EID: 84859414082     PISSN: 10590560     EISSN: None     Source Type: Journal    
DOI: 10.1016/j.iref.2011.12.003     Document Type: Article

References (46)

1. Alizadeh S., Brandt M.W., Diebold F.X. Range-based estimation of stochastic volatility models. Journal of Finance 2002, 57(3):1047-1091.
2. Avramidis A.N., L'Ecuyer P. Efficient Monte Carlo and quasi-monte carlo option pricing under the variance gamma model. Management Science 2006, 52(12):1930-1944.
3. Black F. The pricing of commodity contracts. Journal of Financial Economics 1976, 3(1-2):167-179.
4. Bollerslev T. Generalized autoregressive conditional heteroskedasticity. Journal of Econometrics 1986, 31(3):307-327.
5. Brenner M., Galai D. New financial instruments for hedging changes in volatility. Financial Analysts Journal 1989, 45(4):61-65.
6. Brenner M., Galai D. Hedging volatility in foreign currencies. Journal of Derivatives 1993, 1(1):53-59.
7. Carr P., Madan D.B. Option valuation using the fast Fourier transform. The Journal of Computational Finance 1999, 2(4):61-73.
8. Chopra N., Lakonishok J., Ritter J.R. Measuring abnormal performance: Do stocks overreact?. Journal of Financial Economics 1992, 31(2):235-268.
9. Conrad J., Kaul G. Time-variation in expected returns. Journal of Business 1988, 61(4):409-425.
10. De Bondt W.F.M., Thaler R. Does the stock market overreact?. Journal of Finance 1985, 40(3):793-805.
11. Detemple J.B., Osakwe C. The valuation of volatility options. European Finance Review 2000, 4(1):21-50.
12. Duan J.-C. The GARCH option pricing model. Mathematical Finance 1995, 5(1):13-32.
13. Dumas B.J., Fleming J., Whaley R.E. Implied volatility functions: Empirical tests. Journal of Finance 1998, 53:2059-2106.
14. Fama E.F. The behavior of stock-market prices. Journal of Business 1965, 38(1):34-105.
15. Ferland R., Lalancette S. Dynamics of realized volatilities and correlations: An empirical study. Journal of Banking & Finance 2006, 30:2109-2130.
16. Fisher L. Some new stock-market indexes. Journal of Business 1966, 39(1):191-225.
17. French K.R., Roll R. Stock return variances: The arrival of information and the reaction of traders. Journal of Financial Economics 1986, 17(1):5-26.
18. Gallant A.R., Hsu C.-T., Tauchen G. Using daily range data to calibrate volatility diffusions and extract the forward integrated variance. The Review of Economics and Statistics 1999, 81(4):617-631.
19. Gençay R. Non-linear prediction of security returns with moving average rules. Journal of Forecasting 1996, 15(3):165-174.
20. Granger C.W.J., Newbold P. Forecasting transformed series. Journal of the Royal Statistical Society. Series B (Methodological) 1976, 38(2):189-203.
21. Grünbichler A., Longstaff F.A. Valuing futures and options on volatility. Journal of Banking & Finance 1996, 20(6):985-1001.
22. Grundy B.D. Option prices and the underlying asset's return distribution. Journal of Finance 1991, 46(3):1045-1069.
23. Hamilton J.D. Time-series analysis 1994, Jan, Princeton University Press. 1st ed.
24. Harrison J.M., Pliska S.R. Martingales and stochastic integrals in the theory of continuous trading. Stochastic Processes and their Applications 1981, 11(3):215-260.
25. Heston S.L., Nandi S. A closed-form GARCH option valuation model. Review of Financial Studies 2000, 13(3):585-625.
26. Hirsa A., Madan D.B. Pricing American options under variance gamma. The Journal of Computational Finance 2004, 7:63-80.
27. Huang Y.C., Wu C.W., Wang C.W. Pricing TAIEX options - An ARMA approach. International Research Journal of Finance and Economics 2009, 31:180-193.
28. Huang Y.C., Wu C.W., Wang C.W. Valuing american options under ARMA processes. International Research Journal of Finance and Economics 2009, 28:152-159.
29. Jegadeesh N. Evidence of predictable behavior of security returns. Journal of Finance 1990, 45(3):881-898.
30. Jokivuolle E. Pricing European options on autocorrelated indexes. Journal of Derivatives 1998, 6(2):39-52.
31. Karatzas I., Shreve S.E. Brownian motion and stochastic calculus (graduate texts in mathematics) Aug. 1991, Springer. 2nd ed.
32. Kittiakarasakun J., Tse Y. Modeling the fat tails in Asian stock markets. International Review of Economics and Finance 2011, 20(3):430-440.
33. Klebaner F.C. Introduction to stochastic calculus with applications Jun. 1998, Imperial College Press. 1st ed.
34. Lehmann B.N. Fads, martingales, and market efficiency. Quarterly Journal of Economics 1990, 105(1):1-28.
35. Liao S.-L., Chen C.-C. The valuation of European options when asset returns are autocorrelated. Journal of Futures Markets 2006, 26(1):85-102.
36. Lim K.G., Guo X. Pricing american options with stochastic volatility: Evidence from S&P 500 futures options. Journal of Futures Markets 2000, 20(7):625-659.
37. Lo A.W., Wang J. Implementing option pricing models when asset returns are predictable. Journal of Finance 1995, 50(1):87-129.
38. Madan D.B., Carr P.P., Chang E.C. The variance gamma process and option pricing. European Finance Review 1998, 2(1):79-105.
39. Madan D.B., Seneta E. The variance gamma (VG) model for share market returns. Journal of Business 1990, 63(4):511-524.
40. Matsuda K. Introduction to option pricing with Fourier transform: Option pricing with exponential Lévy models 2004.
41. Pong S., Shackleton M.B., Taylor S.J., Xu X. Forecasting currency volatility: A comparison of implied volatilities and AR(FI)MA models. Journal of Banking & Finance 2004, 28(10):2541-2563.
42. Psychoyios D., Skiadopoulos G. Volatility options: Hedging effectiveness, pricing, and model error. Journal of Futures Markets 2006, 26(1):1-31.
43. Roll R. An analytic valuation formula for unprotected American call options on stocks with known dividends. Journal of Financial Economics 1977, 5(2):251-258.
44. Sargent T.J. Macroeconomic theory 1987, Emerald Group. 2nd ed.
45. Schoutens W. Lévy processes in finance: Pricing financial derivatives 2003, Wiley.
46. Whaley R.E. Derivatives on market volatility: Hedging tools long overdue. Journal of Derivatives 1993, 1(1):71-84.