Options
Are classical option pricing models consistent with observed option second-order moments? Evidence from high-frequency data
Journal
Journal of Banking and Finance
ISSN
0378-4266
ISSN-Digital
1872-6372
Type
journal article
Date Issued
2015-08-28
Author(s)
Abstract
As a means of validating an option pricing model, we compare the ex-post intra-day realized variance of options with the realized variance of the associated underlying asset that would be implied using assumptions as in the Black and Scholes (BS) model, the Heston and the Bates model. Based on data for the S&P 500 index, we find that the BS model is strongly directionally biased due to the presence of stochastic volatility. The Heston model reduces the mismatch in realized variance between the two markets, but deviations are still significant. With the exception of short-dated options, we achieve best approximations after controlling for the presence of jumps in the underlying dynamics. Finally, we provide evidence that, although heavily biased, the realized variance based on the BS model contains relevant predictive information that can be exploited when option high-frequency data is not available.
Language
English
Keywords
Option pricing
high frequency data
realized variance
stochastic volatility
HSG Classification
contribution to scientific community
HSG Profile Area
SEPS - Quantitative Economic Methods
Refereed
Yes
Publisher
Elsevier
Publisher place
Amsterdam
Volume
61
Start page
46
End page
63
Pages
18
Subject(s)
Eprints ID
221836