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Option pricing using EGARCH models

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  • Schmitt, Christian

Abstract

Various empirical studies have shown that the time-varying volatility of asset returns can be described by GARCH (generalised autoregressive conditional heteroskedasticity) models. The corresponding GARCH option pricing model of Duan (1995) is capable of depicting the smile-effect which often can be found in option prices. In some derivative markets, however, the slope of the smile is not symmetrical. In this paper an option pricing model in the context of the EGARCH (Exponential GARCH) process will be developed. Extensive numerical analyses suggest that the EGARCH option pricing model is able to explain the different slopes of the smile curve.

Suggested Citation

  • Schmitt, Christian, 1996. "Option pricing using EGARCH models," ZEW Discussion Papers 96-20, ZEW - Leibniz Centre for European Economic Research.
    • Handle: RePEc:zbw:zewdip:9620
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    References listed on IDEAS

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    Cited by:

    1. Liu, Heping & Shi, Jing, 2013. "Applying ARMA–GARCH approaches to forecasting short-term electricity prices," Energy Economics, Elsevier, vol. 37(C), pages 152-166.
    2. Zhu, Ke & Ling, Shiqing, 2015. "Model-based pricing for financial derivatives," Journal of Econometrics, Elsevier, vol. 187(2), pages 447-457.
    3. Schmitt, Christian & Kaehler, Jürgen, 1996. "Delta-neutral volatility trading with intra-day prices: an application to options on the DAX," ZEW Discussion Papers 96-25, ZEW - Leibniz Centre for European Economic Research.
    4. Hans‐Jochen Bartels, 2000. "On martingale diffusions describing the ‘smile‐effect’ for implied volatilities," Applied Stochastic Models in Business and Industry, John Wiley & Sons, vol. 16(1), pages 1-9, January.

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