An application of closed-form GARCH option-pricing model on FTSE 100 option and volatility

• Autores: YongChern Su, MingDa Chen, HanChing Huang
• Localización: Applied financial economics, ISSN 0960-3107, Vol. 20, Nº. 10-12, 2010, págs. 899-910
• Idioma: inglés
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• Resumen

  • Many researches indicate that the Black-Scholes (BS) option-pricing model demonstrates systematic biases due to some unreasonable assumptions. In practice, implied volatilities tend to differ across exercise prices and time to maturities. To solve the problem, Heston and Nandi (HN) (2000) develop closed-form Generalized Autoregressive Conditional Heteroscedasticity (HN-GARCH) model. In this study, we apply their model on Financial Time Stock Exchange (FTSE) 100 index option. As a benchmark, we employ the ad hoc BS model which uses a separate implied volatility for each option to fit the smirk/smile in implied volatilities. The test finds that the HN GARCH has smaller valuation errors than the ad hoc BS model.