Discrete time option pricing with flexible volatility estimation

Wolfgang Härdle; Christian M. Hafner

By extending the GARCH option pricing model of Duan (1995) to more flexible volatility estimation it is shown that the prices of out-of-the-money options strongly depend on volatility features such as asymmetry. Results are provided for the properties of the stationary pricing distribution in the case of a threshold GARCH model. For a stock index series with a pronounced leverage effect, simulated threshold GARCH option prices are substantially closer to observed market prices than the Black/Scholes and simulated GARCH prices.

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Year of publication:	1997
Authors:	Härdle, Wolfgang ; Hafner, Christian M.
Institutions:	Sonderforschungsbereich Quantifikation und Simulation Ökonomischer Prozesse (contributor)
Publisher:	Berlin : Humboldt-Universität
Subject:	Volatilität \| Volatility \| Optionspreistheorie \| Option pricing theory \| Schätztheorie \| Estimation theory