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GARCH option pricing with implied volatility

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  • N'zue Fofana
  • B. Wade Brorsen

Abstract

Generalized autoregressive conditional heteroskedasticity (GARCH) option pricing models (OPM) with historical volatility have proven superior to the log-normality assumption of the Black option pricing model with historical volatility. This paper estimates implied volatilities from GARCH OPM. The estimated implied volatilities are used to forecast option premia. The GARCH OPM with implied volatility provided more accurate estimates of option premia than the Black option pricing model with implied volatility for options ranging from six to sixteen days to maturity. For options ranging from 21 to 50 days to maturity the Black OPM with implied volatility was more accurate than the GARCH OPM with implied volatility.

Suggested Citation

  • N'zue Fofana & B. Wade Brorsen, 2001. "GARCH option pricing with implied volatility," Applied Economics Letters, Taylor & Francis Journals, vol. 8(5), pages 335-340.
    • Handle: RePEc:taf:apeclt:v:8:y:2001:i:5:p:335-340
    DOI: 10.1080/135048501750157585
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    References listed on IDEAS

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    Cited by:

    1. Shih-Feng Huang & Meihui Guo, 2014. "Model risk of the implied GARCH-normal model," Quantitative Finance, Taylor & Francis Journals, vol. 14(12), pages 2215-2224, December.
    2. K. Maris & K. Nikolopoulos & K. Giannelos & V. Assimakopoulos, 2007. "Options trading driven by volatility directional accuracy," Applied Economics, Taylor & Francis Journals, vol. 39(2), pages 253-260.
    3. Hassan Tanha & Michael Dempsey, 2016. "The Information Content of ASX SPI 200 Implied Volatility," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 19(01), pages 1-14, March.
    4. Thomas Url & Serguei Kaniovski, 2020. "The Potential Capital Requirement for a Minimum Prices Insurance Scheme for Wheat, Maize, and Rape Seed," WIFO Working Papers 601, WIFO.

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