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Empirical performance of stochastic volatility option pricing models

Author

Listed:
  • Przemyslaw S. Stilger

    (Standard Chartered Bank, 1 Basinghall Avenue, London, EC2V 5DD, United Kingdom)

  • Ngoc Quynh Anh Nguyen

    (Regent’s University London, Inner Circle, Regent’s Park, London, NW1 4NS, United Kingdom)

  • Tri Minh Nguyen

    (School of Finance, University of Economics Ho Chi Minh City, 59C Nguyen Dinh Chieu Street, District 3, Ho Chi Minh City, Vietnam)

Abstract

This paper examines the empirical performance of four stochastic volatility option pricing models: Heston, Heston++, Bates and Heston–Hull–White. To compare these models, we use individual stock options data from January 1996 to August 2014. The comparison is made with respect to pricing and hedging performance, implied volatility surface and risk-neutral return distribution characteristics, as well as performance across industries and time. We find that the Heston model outperforms the other models in terms of in-sample pricing, whereas Heston++ model outperforms the other models in terms of out-of-sample hedging. This suggests that taking jumps or stochastic interest rates into account does not improve the model performance after accounting for stochastic volatility. We also find that the model performance deteriorates during the crises as well as when the implied volatility surface is steep in the maturity or strike dimension.

Suggested Citation

  • Przemyslaw S. Stilger & Ngoc Quynh Anh Nguyen & Tri Minh Nguyen, 2021. "Empirical performance of stochastic volatility option pricing models," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 8(01), pages 1-22, March.
    • Handle: RePEc:wsi:ijfexx:v:08:y:2021:i:01:n:s2424786320500565
    DOI: 10.1142/S2424786320500565
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    Cited by:

    1. Vipul Kumar Singh & Pawan Kumar, 2024. "Effectiveness of deterministic option pricing models: new evidence from Nifty and Bank Nifty Index options," Journal of Asset Management, Palgrave Macmillan, vol. 25(2), pages 172-189, March.
    2. Bianca Reichert & Adriano Mendon a Souza, 2022. "Can the Heston Model Forecast Energy Generation? A Systematic Literature Review," International Journal of Energy Economics and Policy, Econjournals, vol. 12(1), pages 289-295.

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