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Is the realized volatility good for option pricing during the recent financial crisis?

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  • Yow-Jen Jou
  • Chih-Wei Wang
  • Wan-Chien Chiu

Abstract

The contributions of this paper are threefold. The first contribution is the proposed logarithmic HAR (log-HAR) option-pricing model, which is more convenient compared with other option pricing models associated with realized volatility in terms of simpler estimation procedure. The second contribution is the test of the empirical implications of heterogeneous autoregressive model of the realized volatility (HAR)-type models in the S&P 500 index options market with comparison of the non-linear asymmetric GARCH option-pricing model, which is the best model in pricing options among generalized autoregressive conditional heteroskedastic-type models. The third contribution is the empirical analysis based on options traded from July 3, 2007 to December 31, 2008, a period covering a recent financial crisis. Overall, the HAR-type models successfully predict out-of-sample option prices because they are based on realized volatilities, which are closer to the expected volatility in financial markets. However, mixed results exist between the log-HAR and the heterogeneous auto-regressive gamma models in pricing options because the former is better than the latter in times of turmoil, whereas it is worse during the rather stable periods. Copyright Springer Science+Business Media, LLC 2013

Suggested Citation

  • Yow-Jen Jou & Chih-Wei Wang & Wan-Chien Chiu, 2013. "Is the realized volatility good for option pricing during the recent financial crisis?," Review of Quantitative Finance and Accounting, Springer, vol. 40(1), pages 171-188, January.
    • Handle: RePEc:kap:rqfnac:v:40:y:2013:i:1:p:171-188
    DOI: 10.1007/s11156-012-0285-0
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    2. Yam Wing Siu, 2020. "Impact of Expected Shortfall Approach on Capital Requirement Under Basel," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 22(04), pages 1-34, January.
    3. Yam Wing Siu, 2018. "Volatility Forecast by Volatility Index and Its Use as a Risk Management Tool Under a Value-at-Risk Approach," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 21(02), pages 1-48, June.
    4. Chen, Jilong & Xu, Liao & Xu, Hao, 2022. "The impact of COVID-19 on commodity options market: Evidence from China," Economic Modelling, Elsevier, vol. 116(C).
    5. Benjamin Mögel & Benjamin R. Auer, 2018. "How accurate are modern Value-at-Risk estimators derived from extreme value theory?," Review of Quantitative Finance and Accounting, Springer, vol. 50(4), pages 979-1030, May.
    6. Chuxuan Xiao & Winifred Huang & David P. Newton, 2024. "Predicting expected idiosyncratic volatility: Empirical evidence from ARFIMA, HAR, and EGARCH models," Review of Quantitative Finance and Accounting, Springer, vol. 63(3), pages 979-1006, October.
    7. Konstantinos Skindilias & Chia Lo, 2015. "Local volatility calibration during turbulent periods," Review of Quantitative Finance and Accounting, Springer, vol. 44(3), pages 425-444, April.
    8. 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.
    9. Ahmed, Walid M.A., 2017. "The impact of foreign equity flows on market volatility during politically tranquil and turbulent times: The Egyptian experience," Research in International Business and Finance, Elsevier, vol. 40(C), pages 61-77.

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    More about this item

    Keywords

    Realized volatility; Log-HAR; HAR; NGARCH; Out-of-sample pricing performance; Option pricing; G15; G17; C15; C22;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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