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GARCH option pricing under skew

Aboura, Sofiane (2005), GARCH option pricing under skew, International Journal of Applied Economics, 4, 6, p. 78-86

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Type
Article accepté pour publication ou publié
Date
2005
Journal name
International Journal of Applied Economics
Volume
4
Number
6
Publisher
Institute of International Economic Studies
Pages
78-86
Metadata
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Author(s)
Aboura, Sofiane
Abstract (EN)
This article is an empirical study dedicated to the GARCH Option pricing model of Duan (1995) applied to the FTSE 100 European style options for various maturities. We analyze the validity of the model given its ability to price one-day ahead out-of-sample call options and also its ability to capture the empirical dynamic of the volatility skew. First, we get a severe mispricing for deep out-of-the-money and short term call options. Second, this model reveals a good ability to capture the change of regime in the implied volatility surface.
Subjects / Keywords
GARCH model; Monte Carlo simulations; Implied Volatility; Volatility Smile
JEL
G13 - Contingent Pricing; Futures Pricing
C13 - Estimation: General