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What drives option prices ?

Author

Listed:
  • Frédéric Abergel

    (FiQuant - Chaire de finance quantitative - MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec, MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris)

  • Riadh Zaatour

    (FiQuant - Chaire de finance quantitative - MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec, MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris)

Abstract

We rely on high frequency data to explore the joint dynamics of underlying and option markets. In particular, high frequency data make observable the realized variance process of the underlying, so its effects on option price dynamics are tested. Empirical results are confronted with the predictions of stochastic volatility models. The study reveals that while the modeling of stochastic volatility gives more robust models, the market does not process information on the realized variance to update option prices.

Suggested Citation

  • Frédéric Abergel & Riadh Zaatour, 2012. "What drives option prices ?," Post-Print hal-00687675, HAL.
    • Handle: RePEc:hal:journl:hal-00687675
    DOI: 10.3905/jot.2012.7.3.012
    Note: View the original document on HAL open archive server: https://hal.science/hal-00687675
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    References listed on IDEAS

    as
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    Cited by:

    1. Mehdi El Amrani & Antoine Jacquier & Claude Martini, 2019. "Dynamics of symmetric SSVI smiles and implied volatility bubbles," Papers 1909.10272, arXiv.org, revised Feb 2021.

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    Keywords

    options; microstructure; smile; stochastic volatility;
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