Christian M. Hafner (CORE, UniversitÊ catholique de Louvain, Louvain-la-Neuve, Belgium) Wolfgang HÄrdle () (Institut fØr Statistik und ãkonometrie, Humboldt-UniversitÄt zu Berlin, Spandauer Str. 1, D-10178 Berlin, Germany)
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By extending the GARCH option pricing model of Duan (1995) to more flexible volatility estimation it is shown that the prices of out-of-the-money options strongly depend on volatility features such as asymmetry. Results are provided for the properties of the stationary pricing distribution in the case of a threshold GARCH model. For a stock index series with a pronounced leverage effect, simulated threshold GARCH option prices are substantially closer to observed market prices than the Black/Scholes and simulated GARCH prices.
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Find related papers by JEL classification: C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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