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Convergence Speed Of Garch Option Price To Diffusion Option Price

Author

Listed:
  • JIN-CHUAN DUAN

    (National University of Singapore, Singapore)

  • YAZHEN WANG

    (University of Wisconsin and National Science Foundation, USA)

  • JIAN ZOU

    (University of Connecticut, USA)

Abstract

It is well known that as the time interval between two consecutive observations shrinks to zero, a properly constructed GARCH model will weakly converge to a bivariate diffusion. Naturally the European option price under the GARCH model will also converge to its bivariate diffusion counterpart. This paper investigates the convergence speed of the GARCH option price. We show that the European option prices under the two corresponding models are equal up to an order near the square root of the length of discrete time interval.

Suggested Citation

  • Jin-Chuan Duan & Yazhen Wang & Jian Zou, 2009. "Convergence Speed Of Garch Option Price To Diffusion Option Price," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 12(03), pages 359-391.
    • Handle: RePEc:wsi:ijtafx:v:12:y:2009:i:03:n:s0219024909005269
    DOI: 10.1142/S0219024909005269
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    Citations

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    Cited by:

    1. Kim, Donggyu & Wang, Yazhen, 2016. "Unified discrete-time and continuous-time models and statistical inferences for merged low-frequency and high-frequency financial data," Journal of Econometrics, Elsevier, vol. 194(2), pages 220-230.
    2. Stentoft, Lars, 2011. "American option pricing with discrete and continuous time models: An empirical comparison," Journal of Empirical Finance, Elsevier, vol. 18(5), pages 880-902.
    3. Badescu, Alexandru & Elliott, Robert J. & Ortega, Juan-Pablo, 2015. "Non-Gaussian GARCH option pricing models and their diffusion limits," European Journal of Operational Research, Elsevier, vol. 247(3), pages 820-830.

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