An Empirical Examination of the Variance-Gamma Model for Foreign Currency Options
We apply the variance-gamma (VG) option-pricing model to currency options. The model is a pure infinite-activity jump model. We examine whether and to what extent this new model can improve the pricing quality for currency options over the existing modified Black-Scholes model and the Merton jump-diffusion (JD) model. We find that the VG model yields better out-of-sample pricing performance than the modified Black-Scholes model or the JD model. In addition, a cross-entropy analysis shows that the VG model is more consistent with the general criterion of utility maximization and optimal portfolio selection.
Year of publication: |
2005
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Authors: | Daal, Elton A. ; Madan, Dilip B. |
Published in: |
The Journal of Business. - University of Chicago Press. - Vol. 78.2005, 6, p. 2121-2152
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Publisher: |
University of Chicago Press |
Saved in:
Online Resource
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