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The performance of popular stochastic volatility option pricing models during the subprime crisis

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  • Thibaut Moyaert
  • Mikael Petitjean

Abstract

Using daily options prices on the Eurostoxx 50 stock index over the whole year 2008, we compare the performance of three popular Stochastic Volatility (SV) models (Heston, 1993; Bates, 1996; Heston and Nandi, 2000), in addition to the traditional Black-Scholes model and a proprietary trading desk model. We show that the most consistent in-sample and out-of-sample statistical performance is obtained for the internal model. However, the Bates model seems to be better suited to Short Term (ST, out-of-the-money) options while the Heston model seems to perform better for medium or Long Term (LT) options. In terms of hedging performance, the Heston and Nandi model exhibits the best average, albeit most volatile, result and the Heston model outperforms the Black-Scholes model in terms of hedging errors, mainly for option contracts that mature in-the-money.

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  • Thibaut Moyaert & Mikael Petitjean, 2011. "The performance of popular stochastic volatility option pricing models during the subprime crisis," Applied Financial Economics, Taylor & Francis Journals, vol. 21(14), pages 1059-1068.
    • Handle: RePEc:taf:apfiec:v:21:y:2011:i:14:p:1059-1068
    DOI: 10.1080/09603107.2011.562161
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    References listed on IDEAS

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    1. M. Escobar-Anel & M. Kschonnek & R. Zagst, 2023. "Mind the cap!—constrained portfolio optimisation in Heston's stochastic volatility model," Quantitative Finance, Taylor & Francis Journals, vol. 23(12), pages 1793-1813, November.
    2. Díaz-Hernández, Adán & Constantinou, Nick, 2019. "A multiple regime extension to the Heston–Nandi GARCH(1,1) model," Journal of Empirical Finance, Elsevier, vol. 53(C), pages 162-180.
    3. Chourdakis, Kyriakos & Dendramis, Yiannis & Tzavalis, Elias, 2014. "Are regime-shift sources of risk priced in the market?," Journal of Empirical Finance, Elsevier, vol. 28(C), pages 151-170.
    4. Dupret, Jean-Loup & Barbarin, Jérôme & Hainaut, Donatien, 2021. "Impact of rough stochastic volatility models on long-term life insurance pricing," LIDAM Discussion Papers ISBA 2021017, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).

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