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It contains an introduction to how simulation methods can be used to price American options and a discussion of various existing methods. An application using one of these methods, the regression based method, to the GARCH option pricing model is also provided
Persistent link: https://www.econbiz.de/10012905711
A method to price American-style option contracts in a limited information framework is introduced. The pricing methodology is based on sequential Monte Carlo techniques, as presented in Doucet, de Freitas, and Gordon's text "Sequential Monte Carlo Methods in Practice", and the least-squares...
Persistent link: https://www.econbiz.de/10013078762
As it is well known from the time-series literature, GARCH processes with non-normal shocks provide better descriptions of stock returns than GARCH processes with normal shocks. However, in the derivatives literature, American option pricing algorithms under GARCH are typically designed to deal...
Persistent link: https://www.econbiz.de/10012921048
We build on of the work of Henry-Labordµere and Lewis on the small-time behaviour of the return distribution under a general local-stochastic volatility model with zero correlation. We do this using the Freidlin-Wentzell theory of large deviations for stochastic differential equations, and then...
Persistent link: https://www.econbiz.de/10013116586
Derivatives have become widely accepted as tools for hedging and risk-management, as well as speculation to some extent. A more recent trend has been gaining ground, namely, arbitrage in derivatives. The critical parameter in derivatives pricing is the volatility of the underlying asset....
Persistent link: https://www.econbiz.de/10013109552
In this paper we propose semi-closed-form solutions, subject to an inversion of the Fourier transform, for the price of VIX options and target volatility options (TVOs) under affine GARCH models based on Gaussian and Inverse Gaussian distributions. We illustrate the advantage of the proposed...
Persistent link: https://www.econbiz.de/10012828387
In this paper, we modify Duan’s (1995) local risk-neutral valuation relationship (mLRNVR) for the GARCH option-pricing models. In our mLRNVR, the conditional variances under two measures are designed to be different and the variance process is more persistent in the risk-neutral measure than...
Persistent link: https://www.econbiz.de/10012174118
Asymmetric volatility concerns the relation of returns to future expected volatility. Much is known from option prices about the marginal risk-neutral distributions of S&P 500 returns and of relative changes in future expected volatility (VIX). While the bivariate risk-neutral distribution...
Persistent link: https://www.econbiz.de/10012938323
We are the first to study the pricing and hedging of VIX options via Monte Carlo (MC) under GARCH(1,1) and Glosten–Jagannathan–Runkle GARCH(1,1) models. Our pricing is ab initio and out‐of‐sample and can be implemented in real time. Importantly, we propose the so‐called single‐option...
Persistent link: https://www.econbiz.de/10013404075
This study compares the efficacy of Black–Scholes implied volatility (BSIV) with model-free implied volatility (MFIV) in providing volatility forecasts for 13 North American, European, and Asian stock market indexes: S&P 500 (United States), S&P/ASX 200 (Australia), S&P/TSX 60 (Canada), AEX...
Persistent link: https://www.econbiz.de/10012905621