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Activity Number: 92 - Time Series and Finance
Type: Contributed
Date/Time: Monday, August 9, 2021 : 10:00 AM to 11:50 AM
Sponsor: Business and Economic Statistics Section
Abstract #318739
Title: Option Pricing with Higher-order Stochastic Volatility Models
Author(s): Md. Nazmul Ahsan* and Jean-Marie Dufour
Companies: Concordia University and McGill University
Keywords: Option pricing; stochastic volatility; financial time series
Abstract:

We study the performance of higher-order stochastic volatility [SV(p)] models in the valuation of options. This class of models provides more flexibility to represent volatility persistence and heavy tails and are natural extensions of the leading Hull and White (1987) model used in option pricing. A simulation-based option pricing algorithm is developed, which uses the winsorized ARMA-based estimator of Ahsan and Dufour (2021). The proposed algorithm is applied to S&P 500 European call options (2015-2019). We find that the SV(3) model provides the smallest pricing error among the competing models in all levels of moneyness. Our findings highlight the usefulness of higher-order SV models for option pricing.


Authors who are presenting talks have a * after their name.

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