Stochastic Volatility Option Pricing Models

2019 ◽  
pp. 461-472
Author(s):  
Cheng-Few Lee ◽  
Hong-Yi Chen ◽  
John Lee
Keyword(s):  
Option Pricing ◽  
Stochastic Volatility ◽  
Pricing Models

Empirical performance of stochastic volatility option pricing models

2021 ◽  
pp. 2050056
Author(s):  
Przemyslaw S. Stilger ◽  
Ngoc Quynh Anh Nguyen ◽  
Tri Minh Nguyen
Keyword(s):  
Option Pricing ◽  
Stochastic Volatility ◽  
Implied Volatility ◽  
Model Performance ◽  
The Other ◽  
Heston Model ◽  
Pricing Models ◽  
Implied Volatility Surface ◽  
Empirical Performance ◽  
Volatility Surface

This paper examines the empirical performance of four stochastic volatility option pricing models: Heston, Heston[Formula: see text], Bates and Heston–Hull–White. To compare these models, we use individual stock options data from January 1996 to August 2014. The comparison is made with respect to pricing and hedging performance, implied volatility surface and risk-neutral return distribution characteristics, as well as performance across industries and time. We find that the Heston model outperforms the other models in terms of in-sample pricing, whereas Heston[Formula: see text] model outperforms the other models in terms of out-of-sample hedging. This suggests that taking jumps or stochastic interest rates into account does not improve the model performance after accounting for stochastic volatility. We also find that the model performance deteriorates during the crises as well as when the implied volatility surface is steep in the maturity or strike dimension.

An empirical exploration of the performance of alternative option pricing models

2019 ◽  
Vol 11 (1) ◽  
pp. 23-49
Author(s):  
Aparna Prasad Bhat
Keyword(s):  
Option Pricing ◽  
Stochastic Volatility ◽  
Emerging Market ◽  
Pricing Models ◽  
Content Type ◽  
Black Scholes ◽  
Out Of Sample ◽  
Hedging Performance ◽  
Practical Implications ◽  
Skewness And Kurtosis

PurposeThe purpose of this paper is to ascertain the effectiveness of major deterministic and stochastic volatility-based option pricing models in pricing and hedging exchange-traded dollar–rupee options over a five-year period since the launch of these options in India.Design/methodology/approachThe paper examines the pricing and hedging performance of five different models, namely, the Black–Scholes–Merton model (BSM), skewness- and kurtosis-adjusted BSM, NGARCH model of Duan, Heston’s stochastic volatility model and anad hocBlack–Scholes (AHBS) model. Risk-neutral structural parameters are extracted by calibrating each model to the prices of traded dollar–rupee call options. These parameters are used to generate out-of-sample model option prices and to construct a delta-neutral hedge for a short option position. Out-of-sample pricing errors and hedging errors are compared to identify the best-performing model. Robustness is tested by comparing the performance of all models separately over turbulent and tranquil periods.FindingsThe study finds that relatively simpler models fare better than more mathematically complex models in pricing and hedging dollar–rupee options during the sample period. This superior performance is observed to persist even when comparisons are made separately over volatile periods and tranquil periods. However the more sophisticated models reveal a lower moneyness-maturity bias as compared to the BSM model.Practical implicationsThe study concludes that incorporation of skewness and kurtosis in the BSM model as well as the practitioners’ approach of using a moneyness-maturity-based volatility within the BSM model (AHBS model) results in better pricing and hedging effectiveness for dollar–rupee options. This conclusion has strong practical implications for market practitioners, hedgers and regulators in the light of increased volatility in the dollar–rupee pair.Originality/valueExisting literature on this topic has largely centered around either US equity index options or options on major liquid currencies. While many studies have solely focused on the pricing performance of option pricing models, this paper examines both the pricing and hedging performance of competing models in the context of Indian currency options. Robustness of findings is tested by comparing model performance across periods of stress and tranquility. To the best of the author’s knowledge, this paper is one of the first comprehensive studies to focus on an emerging market currency pair such as the dollar–rupee.

A comparison of option pricing models

2017 ◽  
Vol 04 (02n03) ◽  
pp. 1750024
Author(s):  
Elham Dastranj ◽  
Roghaye Latifi
Keyword(s):  
Option Pricing ◽  
Stochastic Volatility ◽  
Heston Model ◽  
Pricing Models ◽  
Stochastic Volatility Models ◽  
Numerical Examples ◽  
Call Options ◽  
Volatility Models ◽  
Premium Income

Option pricing under two stochastic volatility models, double Heston model and double Heston with three jumps, is done. Firstly, the efficiency of the second model is shown via FFT method, and numerical examples using power call options. Then it is shown that power option yields more premium income under the second model, double Heston with three jumps, than another one.

Deterministic versus stochastic volatility: implications for option pricing models

1997 ◽  
Vol 7 (5) ◽  
pp. 499-505 ◽  
Author(s):  
Paul Brockman ◽  
Mustafa Chowdhury
Keyword(s):  
Option Pricing ◽  
Stochastic Volatility ◽  
Pricing Models

THE BRITTEN-JONES AND NEUBERGER SMILE-CONSISTENT WITH STOCHASTIC VOLATILITY OPTION PRICING MODEL: A FURTHER ANALYSIS

2002 ◽  
Vol 05 (01) ◽  
pp. 1-31 ◽  
Author(s):  
ALESSANDRO ROSSI
Keyword(s):  
Option Pricing ◽  
Stochastic Volatility ◽  
Pricing Model ◽  
Pricing Models ◽  
No Arbitrage ◽  
Option Pricing Model ◽  
Exotic Option ◽  
Exotic Option Pricing ◽  
Insight Into

In part of the recent financial literature, exotic option pricing models have been built by establishing a link with European-style options. All these models share the characteristic of being consistent with the observed market smile. They differ respect to the specification of the volatility process. This paper provides a deeper insight into the Britten-Jones and Neuberger (1999) smile-consistent no arbitrage with stochastic volatility option pricing model. Their approach is similar, in spirit, to that one of Derman and Kani (1997), but the implementation is simpler and faster. We explain the main features of the model by performing a set of exercises. In addition we propose some extensions of the model, which make it more flexible.

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