IDEAS home Printed from https://ideas.repec.org/p/hal/cesptp/hal-00308985.html
   My bibliography  Save this paper

The Approximate Option Pricing Model: Performances and Dynamic Properties

Author

Listed:
  • Gunther Capelle-Blancard

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique, TEAM - Théories et Applications en Microéconomie et Macroéconomie - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, CADRE - Université de Lille, Droit et Santé)

  • Emmanuel Jurczenko

    (ESCP-EAP - ESCP-EAP - Ecole Supérieure de Commerce de Paris)

  • Bertrand Maillet

    (TEAM - Théories et Applications en Microéconomie et Macroéconomie - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

Abstract

Using high frequency data from ParisBourse SA, this article examines pricing and hedging performances of the Jarrow and Rudd (Journal of Financial Economics 10 (1982) pp. 347–369) model. We first find that this model improves the pricing of CAC 40 index European call options whether in-sample or out-of-sample, and whatever economic or statistic criterion may be used. Moreover, simple models for implied moments lead—in a dynamic setting—to results very close to those from in-sample optimization. But, we also find that this model does not improve hedging strategy and that the Black and Scholes (Journal of Political Economy (1973) pp. 637–655) model is still difficult to beat.

Suggested Citation

  • Gunther Capelle-Blancard & Emmanuel Jurczenko & Bertrand Maillet, 2001. "The Approximate Option Pricing Model: Performances and Dynamic Properties," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00308985, HAL.
    • Handle: RePEc:hal:cesptp:hal-00308985
    DOI: 10.1016/S1042-444X(01)00031-7
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    References listed on IDEAS

    as
    1. C. J. Corrado & Tie Su, 1997. "Implied volatility skews and stock return skewness and kurtosis implied by stock option prices," The European Journal of Finance, Taylor & Francis Journals, vol. 3(1), pages 73-85, March.
    2. Bakshi, Gurdip & Cao, Charles & Chen, Zhiwu, 1997. "Empirical Performance of Alternative Option Pricing Models," Journal of Finance, American Finance Association, vol. 52(5), pages 2003-2049, December.
    3. Mark Rubinstein., 1994. "Implied Binomial Trees," Research Program in Finance Working Papers RPF-232, University of California at Berkeley.
    4. Capelle-Blancard, Gunther & Jurczenko, Emmanuel & Maillet, Bertrand, 2001. "The approximate option pricing model: performances and dynamic properties," Journal of Multinational Financial Management, Elsevier, vol. 11(4-5), pages 427-443, December.
    5. Dilip B. Madan & Frank Milne, 1994. "Contingent Claims Valued And Hedged By Pricing And Investing In A Basis," Mathematical Finance, Wiley Blackwell, vol. 4(3), pages 223-245, July.
    6. Kreps,David M. & Wallis,Kenneth F. (ed.), 1997. "Advances in Economics and Econometrics: Theory and Applications," Cambridge Books, Cambridge University Press, number 9780521589819, September.
    7. Das, Sanjiv Ranjan & Sundaram, Rangarajan K., 1999. "Of Smiles and Smirks: A Term Structure Perspective," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(2), pages 211-239, June.
    8. Robert JARROW & Andrew RUDD, 2008. "Approximate Option Valuation For Arbitrary Stochastic Processes," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 1, pages 9-31, World Scientific Publishing Co. Pte. Ltd..
    9. Rubinstein, Mark, 1994. "Implied Binomial Trees," Journal of Finance, American Finance Association, vol. 49(3), pages 771-818, July.
    10. Kreps,David M. & Wallis,Kenneth F. (ed.), 1997. "Advances in Economics and Econometrics: Theory and Applications," Cambridge Books, Cambridge University Press, number 9780521589826, September.
    11. Jati Sengupta & Yijuan Zheng, 1997. "Estimating skewness persistence in market returns," Applied Financial Economics, Taylor & Francis Journals, vol. 7(5), pages 549-558.
    12. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    13. Kreps,David M. & Wallis,Kenneth F. (ed.), 1997. "Advances in Economics and Econometrics: Theory and Applications," Cambridge Books, Cambridge University Press, number 9780521589833, September.
    14. Scott, Louis O., 1987. "Option Pricing when the Variance Changes Randomly: Theory, Estimation, and an Application," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(4), pages 419-438, December.
    15. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    16. Steven Heston & Saikat Nandi, 1997. "A closed-form GARCH option pricing model," FRB Atlanta Working Paper 97-9, Federal Reserve Bank of Atlanta.
    17. Heston, Steven L, 1993. "Invisible Parameters in Option Prices," Journal of Finance, American Finance Association, vol. 48(3), pages 933-947, July.
    18. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    19. repec:bla:jfinan:v:53:y:1998:i:6:p:2059-2106 is not listed on IDEAS
    20. Hull, John C & White, Alan D, 1987. "The Pricing of Options on Assets with Stochastic Volatilities," Journal of Finance, American Finance Association, vol. 42(2), pages 281-300, June.
    21. Leitch, Gordon & Tanner, J Ernest, 1991. "Economic Forecast Evaluation: Profits versus the Conventional Error Measures," American Economic Review, American Economic Association, vol. 81(3), pages 580-590, June.
    22. Hwang, S. & Satchell, S. E., 1998. "Implied Volatility Forecasting: A Comparison of Different Procedures," Accounting and Finance Discussion Papers 98-af38, Faculty of Economics, University of Cambridge.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jurczenko, Emmanuel & Maillet, Bertrand & Negrea, Bogdan, 2002. "Skewness and kurtosis implied by option prices: a second comment," LSE Research Online Documents on Economics 24938, London School of Economics and Political Science, LSE Library.
    2. Bogdan Negrea & Bertrand Maillet & Emmanuel Jurczenko, 2002. "Revisited Multi-moment Approximate Option," FMG Discussion Papers dp430, Financial Markets Group.
    3. León, à ngel & Mencía, Javier & Sentana, Enrique, 2009. "Parametric Properties of Semi-Nonparametric Distributions, with Applications to Option Valuation," Journal of Business & Economic Statistics, American Statistical Association, vol. 27(2), pages 176-192.
    4. Andreou, Panayiotis C. & Charalambous, Chris & Martzoukos, Spiros H., 2010. "Generalized parameter functions for option pricing," Journal of Banking & Finance, Elsevier, vol. 34(3), pages 633-646, March.
    5. Capelle-Blancard, Gunther & Jurczenko, Emmanuel & Maillet, Bertrand, 2001. "The approximate option pricing model: performances and dynamic properties," Journal of Multinational Financial Management, Elsevier, vol. 11(4-5), pages 427-443, December.
    6. Jurczenko, Emmanuel & Maillet, Bertrand & Negrea, Bogdan, 2002. "Revisited multi-moment approximate option pricing models: a general comparison (Part 1)," LSE Research Online Documents on Economics 24950, London School of Economics and Political Science, LSE Library.
    7. V. L. Martin & G. M. Martin & G. C. Lim, 2005. "Parametric pricing of higher order moments in S&P500 options," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(3), pages 377-404.
    8. Ozge Sezgin Alp, 2016. "The Performance of Skewness and Kurtosis Adjusted Option Pricing Model in Emerging Markets: A case of Turkish Derivatives Market," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 5(3), pages 70-84, April.
    9. Lim, G.C. & Martin, G.M. & Martin, V.L., 2006. "Pricing currency options in the presence of time-varying volatility and non-normalities," Journal of Multinational Financial Management, Elsevier, vol. 16(3), pages 291-314, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Chernov, Mikhail & Ghysels, Eric, 2000. "A study towards a unified approach to the joint estimation of objective and risk neutral measures for the purpose of options valuation," Journal of Financial Economics, Elsevier, vol. 56(3), pages 407-458, June.
    2. Jurczenko, Emmanuel & Maillet, Bertrand & Negrea, Bogdan, 2002. "Revisited multi-moment approximate option pricing models: a general comparison (Part 1)," LSE Research Online Documents on Economics 24950, London School of Economics and Political Science, LSE Library.
    3. Bogdan Negrea & Bertrand Maillet & Emmanuel Jurczenko, 2002. "Revisited Multi-moment Approximate Option," FMG Discussion Papers dp430, Financial Markets Group.
    4. René Garcia & Eric Ghysels & Eric Renault, 2004. "The Econometrics of Option Pricing," CIRANO Working Papers 2004s-04, CIRANO.
    5. Peter Christoffersen & Kris Jacobs, 2004. "Which GARCH Model for Option Valuation?," Management Science, INFORMS, vol. 50(9), pages 1204-1221, September.
    6. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    7. Charles J. Corrado & Tie Su, 1996. "Skewness And Kurtosis In S&P 500 Index Returns Implied By Option Prices," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 19(2), pages 175-192, June.
    8. Capelle-Blancard, G. & Jurczenko, E., 1999. "Une application de la formule de Jarrow et Rudd aux options sur indice CAC 40," Papiers d'Economie Mathématique et Applications 2000.05, Université Panthéon-Sorbonne (Paris 1).
    9. Fiorentini, Gabriele & Leon, Angel & Rubio, Gonzalo, 2002. "Estimation and empirical performance of Heston's stochastic volatility model: the case of a thinly traded market," Journal of Empirical Finance, Elsevier, vol. 9(2), pages 225-255, March.
    10. Lin, Shin-Hung & Huang, Hung-Hsi & Li, Sheng-Han, 2015. "Option pricing under truncated Gram–Charlier expansion," The North American Journal of Economics and Finance, Elsevier, vol. 32(C), pages 77-97.
    11. Christoffersen, Peter & Jacobs, Kris & Chang, Bo Young, 2013. "Forecasting with Option-Implied Information," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 581-656, Elsevier.
    12. David Edelman & Thomas Gillespie, 2000. "The Stochastically Subordinated Poisson Normal Process for Modelling Financial Assets," Annals of Operations Research, Springer, vol. 100(1), pages 133-164, December.
    13. Lim, G.C. & Martin, G.M. & Martin, V.L., 2006. "Pricing currency options in the presence of time-varying volatility and non-normalities," Journal of Multinational Financial Management, Elsevier, vol. 16(3), pages 291-314, July.
    14. Henri Bertholon & Alain Monfort & Fulvio Pegoraro, 2006. "Pricing and Inference with Mixtures of Conditionally Normal Processes," Working Papers 2006-28, Center for Research in Economics and Statistics.
    15. Jin Zhang & Yi Xiang, 2008. "The implied volatility smirk," Quantitative Finance, Taylor & Francis Journals, vol. 8(3), pages 263-284.
    16. Jondeau, Eric & Rockinger, Michael, 2000. "Reading the smile: the message conveyed by methods which infer risk neutral densities," Journal of International Money and Finance, Elsevier, vol. 19(6), pages 885-915, December.
    17. Chernov, Mikhail & Ronald Gallant, A. & Ghysels, Eric & Tauchen, George, 2003. "Alternative models for stock price dynamics," Journal of Econometrics, Elsevier, vol. 116(1-2), pages 225-257.
    18. Christoffersen, Peter & Heston, Steve & Jacobs, Kris, 2006. "Option valuation with conditional skewness," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 253-284.
    19. Peter Christoffersen & Kris Jacobs, 2002. "Which Volatility Model for Option Valuation?," CIRANO Working Papers 2002s-33, CIRANO.
    20. Eberlein, Ernst & Keller, Ulrich & Prause, Karsten, 1998. "New Insights into Smile, Mispricing, and Value at Risk: The Hyperbolic Model," The Journal of Business, University of Chicago Press, vol. 71(3), pages 371-405, July.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hal:cesptp:hal-00308985. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CCSD (email available below). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.