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A GARCH Option Pricing Model with Filtered Historical Simulation

In: Simulating Security Returns: A Filtered Historical Simulation Approach

Author

Listed:
  • Giovanni Barone Adesi
  • Robert F. Engle
  • Loriano Mancini

Abstract

We propose a new method for pricing options based on GARCH models with filtered historical innovations. In an incomplete market framework, we allow for different distributions of historical and pricing return dynamics, which enhances the model’s flexibility to fit market option prices. An extensive empirical analysis based on S&P 500 Index options shows that our model outperforms other competing GARCH pricing models and ad hoc Black-Scholes models.

Suggested Citation

  • Giovanni Barone Adesi & Robert F. Engle & Loriano Mancini, 2014. "A GARCH Option Pricing Model with Filtered Historical Simulation," Palgrave Macmillan Books, in: Giovanni Barone Adesi (ed.), Simulating Security Returns: A Filtered Historical Simulation Approach, chapter 4, pages 66-108, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-137-46555-9_4
    DOI: 10.1057/9781137465559_4
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