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Article: An Empirical Test of the Variance Gamma Option Pricing Model

TitleAn Empirical Test of the Variance Gamma Option Pricing Model
Authors
KeywordsOption pricing
Variance gamma
Option pricing model
Volatility smiles
Hedging performance
Issue Date2002
PublisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/pacfin
Citation
Pacific-Basin Finance Journal, 2002, v. 10 n. 3, p. 267-285 How to Cite?
AbstractIn this paper, we test the three-parameter symmetric variance gamma (SVG) option pricing model and the four-parameter asymmetric variance gamma (AVG) option pricing model empirically. Prices of the Hang Seng Index call options, which are of European style, are used as the data for the empirical test. Since the variance gamma option pricing model is developed for the pricing of European options, the empirical test gives a more conclusive answer than previous papers, which used American option data to the applicability of the VG models. The present study uses a large number of intraday option data, which span over a period of 3 years. Synchronous option and futures data are used throughout the study. Pairwise comparisons between the accuracy of model prices are carried out using both parametric and nonparametric methods. The conclusion is that the VG option pricing model performs marginally better than the Black–Scholes (BS) model. Under the historical approach, the VG models can moderately iron out some of the systematic biases inherent in the BS model. However, under the implied approach, the VG models continue to exhibit predictable biases and its overall performance in pricing and hedging is still far less than desirable.
Persistent Identifierhttp://hdl.handle.net/10722/86068
ISSN
2015 Impact Factor: 0.938
2015 SCImago Journal Rankings: 0.541

 

DC FieldValueLanguage
dc.contributor.authorLam, Ken_HK
dc.contributor.authorChang, ECen_HK
dc.contributor.authorLee, MCen_HK
dc.date.accessioned2010-09-06T09:12:26Z-
dc.date.available2010-09-06T09:12:26Z-
dc.date.issued2002en_HK
dc.identifier.citationPacific-Basin Finance Journal, 2002, v. 10 n. 3, p. 267-285en_HK
dc.identifier.issn0927-538Xen_HK
dc.identifier.urihttp://hdl.handle.net/10722/86068-
dc.description.abstractIn this paper, we test the three-parameter symmetric variance gamma (SVG) option pricing model and the four-parameter asymmetric variance gamma (AVG) option pricing model empirically. Prices of the Hang Seng Index call options, which are of European style, are used as the data for the empirical test. Since the variance gamma option pricing model is developed for the pricing of European options, the empirical test gives a more conclusive answer than previous papers, which used American option data to the applicability of the VG models. The present study uses a large number of intraday option data, which span over a period of 3 years. Synchronous option and futures data are used throughout the study. Pairwise comparisons between the accuracy of model prices are carried out using both parametric and nonparametric methods. The conclusion is that the VG option pricing model performs marginally better than the Black–Scholes (BS) model. Under the historical approach, the VG models can moderately iron out some of the systematic biases inherent in the BS model. However, under the implied approach, the VG models continue to exhibit predictable biases and its overall performance in pricing and hedging is still far less than desirable.-
dc.languageengen_HK
dc.publisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/pacfinen_HK
dc.relation.ispartofPacific-Basin Finance Journalen_HK
dc.rightsPacific-Basin Finance Journal. Copyright © Elsevier BV.en_HK
dc.subjectOption pricing-
dc.subjectVariance gamma-
dc.subjectOption pricing model-
dc.subjectVolatility smiles-
dc.subjectHedging performance-
dc.titleAn Empirical Test of the Variance Gamma Option Pricing Modelen_HK
dc.typeArticleen_HK
dc.identifier.openurlhttp://library.hku.hk:4550/resserv?sid=HKU:IR&issn=0927-538X&volume=10&issue=3&spage=267&epage=285&date=2002&atitle=An+Empirical+Test+of+the+Variance+Gamma+Option+Pricing+Modelen_HK
dc.identifier.emailChang, EC: ecchang@business.hku.hken_HK
dc.identifier.authorityChang, EC=rp01050en_HK
dc.description.naturelink_to_subscribed_fulltext-
dc.identifier.doi10.1016/S0927-538X(02)00047-1-
dc.identifier.scopuseid_2-s2.0-0036099603-
dc.identifier.hkuros67960en_HK

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