Option pricing with state‐dependent pricing kernel

Autor:	Chen Tong, Peter Reinhard Hansen, Zhuo Huang
Rok vydání:	2022
Předmět:	Economics and Econometrics Edgeworth expansion Option pricing Accounting Realized GARCH Regime-switching Variance risk premium General Business Management and Accounting Finance
Zdroj:	Journal of Futures Markets. 42:1409-1433
ISSN:	1096-9934 0270-7314
DOI:	10.1002/fut.22338
Popis:	We introduce a new volatility model for option pricing that combines Markov switching with the realized generalized autoregressive conditional heteroskedasticity (GARCH) framework. This leads to a novel pricing kernel with a state-dependent variance risk premium and a pricing formula for European options, which is derived with an analytical approximation method. We apply the Markov-switching Realized GARCH model to Standard and Poor's 500 index options from 1990 to 2019 and find that investors' aversion to volatility-specific risk is time-varying. The proposed framework outperforms competing models and reduces (in-sample and out-of-sample) option-pricing errors by 15% or more.
Databáze:	OpenAIRE
Externí odkaz:	https://explore.openaire.eu/search/publication?articleId=doi_dedup___::d94e1c819099f0a7a02d51fa3010f0f8 https://doi.org/10.1002/fut.22338 Zobrazit plný text záznamu Plný text ve formátu PDF Plný text ve formátu HTML
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