Option pricing with non-Gaussian scaling and infinite-state switching volatility
Volatility clustering, long-range dependence, and non-Gaussian scaling are stylized facts of financial assets dynamics. They are ignored in the Black & Scholes framework, but have a relevant impact on the pricing of options written on financial assets. Using a recent model for market dynamics which adequately captures the above stylized facts, we derive closed form equations for option pricing, obtaining the Black & Scholes as a special case. By applying our pricing equations to a major equity index option dataset, we show that inclusion of stylized features in financial modeling moves derivative prices about 30% closer to the market values without the need of calibrating models parameters on available derivative prices.
Year of publication: |
2013-07
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Authors: | Baldovin, Fulvio ; Caporin, Massimiliano ; Caraglio, Michele ; Stella, Attilio ; Zamparo, Marco |
Institutions: | arXiv.org |
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