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Article: Model-based pricing for financial derivatives

TitleModel-based pricing for financial derivatives
Authors
KeywordsOption valuation
NGARCH
Risk neutralized measure
Non-normal innovation
EGARCH and GJR models
Volatility skew
Issue Date2015
Citation
Journal of Econometrics, 2015, v. 187, n. 2, p. 447-457 How to Cite?
Abstract© 2015 Elsevier B.V.Assume that St is a stock price process and Bt is a bond price process with a constant continuously compounded risk-free interest rate, where both are defined on an appropriate probability space P. Let yt=log(St/St-1). yt can be generally decomposed into a conditional mean plus a noise with volatility components, but the discounted St is not a martingale under P. Under a general framework, we obtain a risk-neutralized measure Q under which the discounted St is a martingale in this paper. Using this measure, we show how to derive the risk neutralized price for the derivatives. Special examples, such as NGARCH, EGARCH and GJR pricing models, are given. Simulation study reveals that these pricing models can capture the "volatility skew" of implied volatilities in the European option. A small application highlights the importance of our model-based pricing procedure.
Persistent Identifierhttp://hdl.handle.net/10722/231009
ISSN
2015 Impact Factor: 1.611
2015 SCImago Journal Rankings: 3.781

 

DC FieldValueLanguage
dc.contributor.authorZhu, Ke-
dc.contributor.authorLing, Shiqing-
dc.date.accessioned2016-09-01T06:07:22Z-
dc.date.available2016-09-01T06:07:22Z-
dc.date.issued2015-
dc.identifier.citationJournal of Econometrics, 2015, v. 187, n. 2, p. 447-457-
dc.identifier.issn0304-4076-
dc.identifier.urihttp://hdl.handle.net/10722/231009-
dc.description.abstract© 2015 Elsevier B.V.Assume that St is a stock price process and Bt is a bond price process with a constant continuously compounded risk-free interest rate, where both are defined on an appropriate probability space P. Let yt=log(St/St-1). yt can be generally decomposed into a conditional mean plus a noise with volatility components, but the discounted St is not a martingale under P. Under a general framework, we obtain a risk-neutralized measure Q under which the discounted St is a martingale in this paper. Using this measure, we show how to derive the risk neutralized price for the derivatives. Special examples, such as NGARCH, EGARCH and GJR pricing models, are given. Simulation study reveals that these pricing models can capture the "volatility skew" of implied volatilities in the European option. A small application highlights the importance of our model-based pricing procedure.-
dc.languageeng-
dc.relation.ispartofJournal of Econometrics-
dc.subjectOption valuation-
dc.subjectNGARCH-
dc.subjectRisk neutralized measure-
dc.subjectNon-normal innovation-
dc.subjectEGARCH and GJR models-
dc.subjectVolatility skew-
dc.titleModel-based pricing for financial derivatives-
dc.typeArticle-
dc.description.natureLink_to_subscribed_fulltext-
dc.identifier.doi10.1016/j.jeconom.2015.02.030-
dc.identifier.scopuseid_2-s2.0-84945489528-
dc.identifier.volume187-
dc.identifier.issue2-
dc.identifier.spage447-
dc.identifier.epage457-
dc.identifier.eissn1872-6895-

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