Published in:KAIST Business School Working Paper Series ; No. 2010-004
Extent:
1 Online-Ressource (38 p)
Language:
English
DOI:
10.2139/ssrn.1582255
Identifier:
Origination:
Footnote:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments March 1, 2010 erstellt
Description:
Based on the theory of a wedge between the physical and risk-neutral conditional volatilities in Christoffersen, Elkamhi, Feunou, and Jacobs (2009), we develop a modification on the GARCH option pricing model with the filtered historical simulation proposed in Barone-Adesi, Engle, and Mancini (2008). The current conditional volatilities under the physical and risk-neutral measures are the same in the previous model, but should have been allowed to be different. Using an extensive data on S&P 500 index options, our approach, which employs the current risk-neutral conditional volatility estimated from the cross-section of the option prices (in contrast to the existing GARCH option pricing models), maintains theoretical consistency under conditional non-normality as well as improves the empirical performances. Remarkably, the risk-neutral volatility dynamics are stable over time under this model. In addition, the comparison between the VIX index and the risk-neutral integrated volatility validates our approach economically