Pricing individual stock options using both stock and market index information

Publikation: Bidrag til tidsskrift/Konferencebidrag i tidsskrift /Bidrag til avisTidsskriftartikelForskningpeer review

Standard

Pricing individual stock options using both stock and market index information. / Rombouts, Jeroen V.K.; Stentoft, Lars; Violante, Francesco.

I: Journal of Banking and Finance, Bind 111, 105727, 02.2020.

Publikation: Bidrag til tidsskrift/Konferencebidrag i tidsskrift /Bidrag til avisTidsskriftartikelForskningpeer review

Harvard

APA

CBE

MLA

Vancouver

Author

Rombouts, Jeroen V.K. ; Stentoft, Lars ; Violante, Francesco. / Pricing individual stock options using both stock and market index information. I: Journal of Banking and Finance. 2020 ; Bind 111.

Bibtex

@article{54003661192d405d8e2931b5c31a82ee,
title = "Pricing individual stock options using both stock and market index information",
abstract = "When it comes to individual stock option pricing, most applications consider a univariate framework. From a theoretical point of view this is unsatisfactory as we know that the expected return of any asset is closely related to the exposure to the market risk factors. To address this, we model the evolution of the individual stock returns together with the market index returns in a flexible bivariate model in line with theory. The model parameters are estimated using both historical returns and aggregated option data from the index and the individual stocks. We assess the model performance by pricing a large set of individual stock options on 26 major US stocks over a long time period including the global financial crisis. Our results show that the losses from using a univariate formulation amounts to 11% on average when compared to our preferred bivariate specification.",
keywords = "American option pricing, Economic loss, Forecasting, Multivariate GARCH",
author = "Rombouts, {Jeroen V.K.} and Lars Stentoft and Francesco Violante",
year = "2020",
month = feb,
doi = "10.1016/j.jbankfin.2019.105727",
language = "English",
volume = "111",
journal = "Journal of Banking & Finance",
issn = "0378-4266",
publisher = "Elsevier BV",

}

RIS

TY - JOUR

T1 - Pricing individual stock options using both stock and market index information

AU - Rombouts, Jeroen V.K.

AU - Stentoft, Lars

AU - Violante, Francesco

PY - 2020/2

Y1 - 2020/2

N2 - When it comes to individual stock option pricing, most applications consider a univariate framework. From a theoretical point of view this is unsatisfactory as we know that the expected return of any asset is closely related to the exposure to the market risk factors. To address this, we model the evolution of the individual stock returns together with the market index returns in a flexible bivariate model in line with theory. The model parameters are estimated using both historical returns and aggregated option data from the index and the individual stocks. We assess the model performance by pricing a large set of individual stock options on 26 major US stocks over a long time period including the global financial crisis. Our results show that the losses from using a univariate formulation amounts to 11% on average when compared to our preferred bivariate specification.

AB - When it comes to individual stock option pricing, most applications consider a univariate framework. From a theoretical point of view this is unsatisfactory as we know that the expected return of any asset is closely related to the exposure to the market risk factors. To address this, we model the evolution of the individual stock returns together with the market index returns in a flexible bivariate model in line with theory. The model parameters are estimated using both historical returns and aggregated option data from the index and the individual stocks. We assess the model performance by pricing a large set of individual stock options on 26 major US stocks over a long time period including the global financial crisis. Our results show that the losses from using a univariate formulation amounts to 11% on average when compared to our preferred bivariate specification.

KW - American option pricing

KW - Economic loss

KW - Forecasting

KW - Multivariate GARCH

UR - http://www.scopus.com/inward/record.url?scp=85076827272&partnerID=8YFLogxK

U2 - 10.1016/j.jbankfin.2019.105727

DO - 10.1016/j.jbankfin.2019.105727

M3 - Journal article

AN - SCOPUS:85076827272

VL - 111

JO - Journal of Banking & Finance

JF - Journal of Banking & Finance

SN - 0378-4266

M1 - 105727

ER -