CREATES

TY - JOUR

T1 - Option Pricing with the Realized GARCH Model

T2 - An Analytical Approximation Approach

AU - Huang, Zhuo

AU - Wang, Tianyi

AU - Hansen, Peter Reinhard

PY - 2017/4/1

Y1 - 2017/4/1

N2 - We derive a pricing formula for European options for the Realized GARCH framework based on an analytical approximation using an Edgeworth expansion for the density of cumulative return. Existing approximations in this context are based on a Gram–Charlier expansion while the proper Edgeworth expansion is more accurate. In relation to existing discrete-time option pricing models with realized volatility, our model is log-linear, non-affine, with a flexible leverage effect. We conduct an extensive empirical analysis on S&P500 index options and the results show that our computationally fast formula outperforms competing methods in terms of pricing errors, both in-sample and out-of-sample.

AB - We derive a pricing formula for European options for the Realized GARCH framework based on an analytical approximation using an Edgeworth expansion for the density of cumulative return. Existing approximations in this context are based on a Gram–Charlier expansion while the proper Edgeworth expansion is more accurate. In relation to existing discrete-time option pricing models with realized volatility, our model is log-linear, non-affine, with a flexible leverage effect. We conduct an extensive empirical analysis on S&P500 index options and the results show that our computationally fast formula outperforms competing methods in terms of pricing errors, both in-sample and out-of-sample.

UR - http://www.scopus.com/inward/record.url?scp=85004011458&partnerID=8YFLogxK

U2 - 10.1002/fut.21821

DO - 10.1002/fut.21821

M3 - Journal article

AN - SCOPUS:85004011458

VL - 37

SP - 328

EP - 358

JO - The Journal of Futures Markets

JF - The Journal of Futures Markets

SN - 0270-7314

IS - 4

ER -