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Evaluation of Black-Scholes and GARCH Models Using Currency Call Options Data

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  • T. Harikumar
  • Maria E. de Boyrie
  • Simon J. Pak

Abstract

This paper empirically examines the performance of Black-Scholes and Garch-M call option pricing models using call options data for British Pounds, Swiss Francs and Japanese Yen. The daily exchange rates exhibit an overwhelming presence of volatility clustering, suggesting that a richer model with ARCH/GARCH effects might have a better fit with actual prices. We perform dominant tests and calculate average percent mean squared errors of model prices. Our findings indicate that the Black-Scholes model outperforms the GARCH models. An implication of this result is that participants in the currency call options market do not seem to price volatility clusters in the underlying process.

Suggested Citation

  • T. Harikumar & Maria E. de Boyrie & Simon J. Pak, 2004. "Evaluation of Black-Scholes and GARCH Models Using Currency Call Options Data," Review of Quantitative Finance and Accounting, Springer, vol. 23(4), pages 299-312, December.
    • Handle: RePEc:kap:rqfnac:v:23:y:2004:i:4:p:299-312
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    Cited by:

    1. Kartono, Agus & Solekha, Siti & Sumaryada, Tony & Irmansyah,, 2021. "Foreign currency exchange rate prediction using non-linear Schrödinger equations with economic fundamental parameters," Chaos, Solitons & Fractals, Elsevier, vol. 152(C).
    2. Lingling Xu & Hongjie Zhang & Fu Lee Wang, 2023. "Pricing of Arithmetic Average Asian Option by Combining Variance Reduction and Quasi-Monte Carlo Method," Mathematics, MDPI, vol. 11(3), pages 1-14, January.
    3. Aparna Bhat & Kirti Arekar, 2016. "Empirical Performance of Black-Scholes and GARCH Option Pricing Models during Turbulent Times: The Indian Evidence," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(3), pages 123-136, March.
    4. Cheng-Few Lee & Oleg Sokolinskiy, 2015. "R-2GAM stochastic volatility model: flexibility and calibration," Review of Quantitative Finance and Accounting, Springer, vol. 45(3), pages 463-483, October.
    5. Zhushun Yuan & Gemai Chen, 2009. "Asymptotic Normality for EMS Option Price Estimator with Continuous or Discontinuous Payoff Functions," Management Science, INFORMS, vol. 55(8), pages 1438-1450, August.
    6. Oleg Sokolinskiy, 2020. "Conditional dependence in post-crisis markets: dispersion and correlation skew trades," Review of Quantitative Finance and Accounting, Springer, vol. 55(2), pages 389-426, August.

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