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Article: Pricing and hedging long-term options

TitlePricing and hedging long-term options
Authors
KeywordsLEAPS
Jumps
Stochastic volatility
Stochastic interest rates
Option pricing and hedging
Issue Date2000
Citation
Journal of Econometrics, 2000, v. 94, n. 1-2, p. 277-318 How to Cite?
AbstractDo long-term and short-term options contain differential information? If so, can long-term options better differentiate among alternative models? To answer these questions, we first demonstrate analytically that differences among alternative models usually may not surface when applied to short-term options, but do so when applied to long-term contracts. Using S&P 500 options and LEAPS, we find that short- and long-term contracts indeed contain different information. While the data suggest little gains from modeling stochastic interest rates or random jumps (beyond stochastic volatility) for pricing LEAPS, incorporating stochastic interest rates can nonetheless enhance hedging performance in certain cases involving long-term contracts. © 2000 Elsevier Science S.A. All rights reserved.
Persistent Identifierhttp://hdl.handle.net/10722/212656
ISSN
2015 Impact Factor: 1.611
2015 SCImago Journal Rankings: 3.781

 

DC FieldValueLanguage
dc.contributor.authorBakshi, Gurdip-
dc.contributor.authorCao, Charles-
dc.contributor.authorChen, Zhiwu-
dc.date.accessioned2015-07-28T04:04:35Z-
dc.date.available2015-07-28T04:04:35Z-
dc.date.issued2000-
dc.identifier.citationJournal of Econometrics, 2000, v. 94, n. 1-2, p. 277-318-
dc.identifier.issn0304-4076-
dc.identifier.urihttp://hdl.handle.net/10722/212656-
dc.description.abstractDo long-term and short-term options contain differential information? If so, can long-term options better differentiate among alternative models? To answer these questions, we first demonstrate analytically that differences among alternative models usually may not surface when applied to short-term options, but do so when applied to long-term contracts. Using S&P 500 options and LEAPS, we find that short- and long-term contracts indeed contain different information. While the data suggest little gains from modeling stochastic interest rates or random jumps (beyond stochastic volatility) for pricing LEAPS, incorporating stochastic interest rates can nonetheless enhance hedging performance in certain cases involving long-term contracts. © 2000 Elsevier Science S.A. All rights reserved.-
dc.languageeng-
dc.relation.ispartofJournal of Econometrics-
dc.subjectLEAPS-
dc.subjectJumps-
dc.subjectStochastic volatility-
dc.subjectStochastic interest rates-
dc.subjectOption pricing and hedging-
dc.titlePricing and hedging long-term options-
dc.typeArticle-
dc.description.natureLink_to_subscribed_fulltext-
dc.identifier.scopuseid_2-s2.0-0003289586-
dc.identifier.volume94-
dc.identifier.issue1-2-
dc.identifier.spage277-
dc.identifier.epage318-

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