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- Publisher Website: 10.1016/j.jeconom.2015.02.030
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Article: Model-based pricing for financial derivatives
Title | Model-based pricing for financial derivatives |
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Authors | |
Keywords | Option valuation NGARCH Risk neutralized measure Non-normal innovation EGARCH and GJR models Volatility skew |
Issue Date | 2015 |
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 Identifier | http://hdl.handle.net/10722/231009 |
ISSN | 2023 Impact Factor: 9.9 2023 SCImago Journal Rankings: 9.161 |
ISI Accession Number ID |
DC Field | Value | Language |
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dc.contributor.author | Zhu, Ke | - |
dc.contributor.author | Ling, Shiqing | - |
dc.date.accessioned | 2016-09-01T06:07:22Z | - |
dc.date.available | 2016-09-01T06:07:22Z | - |
dc.date.issued | 2015 | - |
dc.identifier.citation | Journal of Econometrics, 2015, v. 187, n. 2, p. 447-457 | - |
dc.identifier.issn | 0304-4076 | - |
dc.identifier.uri | http://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.language | eng | - |
dc.relation.ispartof | Journal of Econometrics | - |
dc.subject | Option valuation | - |
dc.subject | NGARCH | - |
dc.subject | Risk neutralized measure | - |
dc.subject | Non-normal innovation | - |
dc.subject | EGARCH and GJR models | - |
dc.subject | Volatility skew | - |
dc.title | Model-based pricing for financial derivatives | - |
dc.type | Article | - |
dc.description.nature | link_to_subscribed_fulltext | - |
dc.identifier.doi | 10.1016/j.jeconom.2015.02.030 | - |
dc.identifier.scopus | eid_2-s2.0-84945489528 | - |
dc.identifier.volume | 187 | - |
dc.identifier.issue | 2 | - |
dc.identifier.spage | 447 | - |
dc.identifier.epage | 457 | - |
dc.identifier.eissn | 1872-6895 | - |
dc.identifier.isi | WOS:000357348300005 | - |
dc.identifier.issnl | 0304-4076 | - |