[go: up one dir, main page]

IDEAS home Printed from https://ideas.repec.org/a/eee/finlet/v7y2010i1p24-28.html
   My bibliography  Save this article

Martingalized historical approach for option pricing

Author

Listed:
  • Chorro, C.
  • Guégan, D.
  • Ielpo, F.
Abstract
In a discrete time option pricing framework, we compare the empirical performance of two pricing methodologies, namely the affine stochastic discount factor (SDF) and the empirical martingale correction methodologies. Using a CAC 40 options dataset, the differences are found to be small: the higher order moment correction involved in the SDF approach may not be that essential to reduce option pricing errors. This paper puts into evidence the fact that an appropriate modelling under the historical measure associated with an adequate correction (that we call here a "martingale correction") permits to provide option prices which are close to market ones.

Suggested Citation

  • Chorro, C. & Guégan, D. & Ielpo, F., 2010. "Martingalized historical approach for option pricing," Finance Research Letters, Elsevier, vol. 7(1), pages 24-28, March.
  • Handle: RePEc:eee:finlet:v:7:y:2010:i:1:p:24-28
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1544-6123(09)00057-9
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-370, March.
    2. Jin-Chuan Duan & Jean-Guy Simonato, 1995. "Empirical Martingale Simulation for Asset Prices," CIRANO Working Papers 95s-43, CIRANO.
    3. Christophe Chorro & Dominique Guegan & Florian Ielpo, 2008. "Option pricing under GARCH models with generalized hyperbolic innovations (I): methodology," Documents de travail du Centre d'Economie de la Sorbonne b08037, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    4. Robert J. Elliott & Dilip B. Madan, 1998. "A Discrete Time Equivalent Martingale Measure," Mathematical Finance, Wiley Blackwell, vol. 8(2), pages 127-152, April.
    5. Mercuri, Lorenzo, 2008. "Option pricing in a Garch model with tempered stable innovations," Finance Research Letters, Elsevier, vol. 5(3), pages 172-182, September.
    6. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    7. Giovanni Barone-Adesi & Robert F. Engle & Loriano Mancini, 2007. "A GARCH Option Pricing Model in Incomplete Markets," Swiss Finance Institute Research Paper Series 07-03, Swiss Finance Institute.
    8. Jin-Chuan Duan & Jean-Guy Simonato, 1998. "Empirical Martingale Simulation for Asset Prices," Management Science, INFORMS, vol. 44(9), pages 1218-1233, September.
    9. Christophe Chorro & Dominique Guegan & Florian Ielpo, 2008. "Option pricing under GARCH models with generalized hyperbolic innovations (II): data and results," Documents de travail du Centre d'Economie de la Sorbonne b08047, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Guégan, Dominique & Ielpo, Florian & Lalaharison, Hanjarivo, 2013. "Option pricing with discrete time jump processes," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2417-2445.
    2. Dominique Guegan & Florian Ielpo & Hanjarivo Lalaharison, 2012. "Option pricing with discrete time jump processes," Post-Print halshs-00611706, HAL.
    3. Badescu, Alexandru & Cui, Zhenyu & Ortega, Juan-Pablo, 2016. "A note on the Wang transform for stochastic volatility pricing models," Finance Research Letters, Elsevier, vol. 19(C), pages 189-196.
    4. Christophe Chorro & Dominique Guegan & Florian Ielpo, 2012. "Option Pricing for GARCH-type Models with Generalized Hyperbolic Innovations," Post-Print hal-00511965, HAL.
    5. Christophe Chorro & Dominique Guegan & Florian Ielpo, 2010. "Option pricing for GARCH-type models with generalized hyperbolic innovations," Post-Print halshs-00469529, HAL.
    6. Marius-Cristian Frunza & Dominique Guegan & Antonin Lassoudière, 2010. "Dynamic factor analysis of carbon allowances prices: From classic Arbitrage Pricing Theory to Switching Regimes," Post-Print halshs-00505145, HAL.
    7. Marius-Cristian Frunza & Dominique Guegan & Antonin Lassoudière, 2010. "Statistical evidence of tax fraud on the carbon allowances market," Post-Print halshs-00523458, HAL.
    8. Chorro, Christophe & Guégan, Dominique & Ielpo, Florian & Lalaharison, Hanjarivo, 2018. "Testing for leverage effects in the returns of US equities," Journal of Empirical Finance, Elsevier, vol. 48(C), pages 290-306.
    9. Christophe Chorro & Dominique Guegan & Florian Ielpo, 2012. "Option Pricing for GARCH-type Models with Generalized Hyperbolic Innovations," PSE-Ecole d'économie de Paris (Postprint) hal-00511965, HAL.
    10. Christophe Chorro & Dominique Guegan & Florian Ielpo, 2010. "Likelihood-Related Estimation Methods and Non-Gaussian GARCH Processes," Post-Print halshs-00523371, HAL.
    11. Christophe Chorro & Dominique Guegan & Florian Ielpo & Hanjarivo Lalaharison, 2017. "Testing for Leverage Effects in the Returns of US Equities," Post-Print halshs-00973922, HAL.
    12. Marius-Cristian Frunza & Dominique Guegan, 2010. "Risk Assessment for a Structured Product Specific to the CO2 Emission Permits Market," Post-Print halshs-00504209, HAL.
    13. Christophe Chorro & Dominique Guegan & Florian Ielpo & Hanjarivo Lalaharison, 2014. "Testing for Leverage Effect in Financial Returns," Documents de travail du Centre d'Economie de la Sorbonne 14022, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Christophe Chorro & Dominique Guegan & Florian Ielpo, 2009. "Martingalized Historical approach for Option Pricing," Post-Print halshs-00376756, HAL.
    2. Christophe Chorro & Dominique Guegan & Florian Ielpo, 2010. "Martingalized Historical approach for Option Pricing," Post-Print halshs-00437927, HAL.
    3. Christophe Chorro & Dominique Guegan & Florian Ielpo, 2008. "Option Pricing under GARCH models with Generalized Hyperbolic distribution (II) : Data and Results," Post-Print hal-00308687, HAL.
    4. Dominique Guegan & Jing Zang, 2009. "Pricing bivariate option under GARCH-GH model with dynamic copula: application for Chinese market," The European Journal of Finance, Taylor & Francis Journals, vol. 15(7-8), pages 777-795.
    5. Guégan, Dominique & Ielpo, Florian & Lalaharison, Hanjarivo, 2013. "Option pricing with discrete time jump processes," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2417-2445.
    6. Christophe Chorro & Dominique Guegan & Florian Ielpo, 2010. "Martingalized Historical approach for Option Pricing," PSE-Ecole d'économie de Paris (Postprint) halshs-00437927, HAL.
    7. Christophe Chorro & Dominique Guegan & Florian Ielpo, 2010. "Option pricing for GARCH-type models with generalized hyperbolic innovations," Post-Print halshs-00469529, HAL.
    8. Frijns, Bart & Lehnert, Thorsten & Zwinkels, Remco C.J., 2010. "Behavioral heterogeneity in the option market," Journal of Economic Dynamics and Control, Elsevier, vol. 34(11), pages 2273-2287, November.
    9. Matthias R. Fengler & Helmut Herwartz & Christian Werner, 2012. "A Dynamic Copula Approach to Recovering the Index Implied Volatility Skew," Journal of Financial Econometrics, Oxford University Press, vol. 10(3), pages 457-493, June.
    10. Alexandru Badescu & Robert J. Elliott & Juan-Pablo Ortega, 2012. "Quadratic hedging schemes for non-Gaussian GARCH models," Papers 1209.5976, arXiv.org, revised Dec 2013.
    11. Dominique Guegan & Florian Ielpo & Hanjarivo Lalaharison, 2012. "Option pricing with discrete time jump processes," Post-Print halshs-00611706, HAL.
    12. repec:dau:papers:123456789/2138 is not listed on IDEAS
    13. Matthias R. Fengler & Alexander Melnikov, 2018. "GARCH option pricing models with Meixner innovations," Review of Derivatives Research, Springer, vol. 21(3), pages 277-305, October.
    14. Huang, Shih-Feng & Tu, Ya-Ting, 2014. "Asymptotic distribution of the EPMS estimator for financial derivatives pricing," Computational Statistics & Data Analysis, Elsevier, vol. 73(C), pages 129-145.
    15. Shih-Feng Huang & Meihui Guo, 2014. "Model risk of the implied GARCH-normal model," Quantitative Finance, Taylor & Francis Journals, vol. 14(12), pages 2215-2224, December.
    16. Masato Ubukata & Toshiaki Watanabe, 2013. "Pricing Nikkei 225 Options Using Realized Volatility," Global COE Hi-Stat Discussion Paper Series gd12-273, Institute of Economic Research, Hitotsubashi University.
    17. Christophe Chorro & Dominique Guegan & Florian Ielpo, 2012. "Option Pricing for GARCH-type Models with Generalized Hyperbolic Innovations," Post-Print hal-00511965, HAL.
    18. Christophe Chorro & Dominique Guegan & Florian Ielpo, 2012. "Option Pricing for GARCH-type Models with Generalized Hyperbolic Innovations," PSE-Ecole d'économie de Paris (Postprint) hal-00511965, HAL.
    19. Dominique Guegan & Jing Zhang, 2009. "Pricing bivariate option under GARCH-GH model with dynamic copula: application for Chinese market," Post-Print halshs-00368336, HAL.
    20. Monfort, Alain & Pegoraro, Fulvio, 2012. "Asset pricing with Second-Order Esscher Transforms," Journal of Banking & Finance, Elsevier, vol. 36(6), pages 1678-1687.
    21. Zhushun Yuan & Gemai Chen, 2009. "Asymptotic Normality for EMS Option Price Estimator with Continuous or Discontinuous Payoff Functions," Management Science, INFORMS, vol. 55(8), pages 1438-1450, August.

    More about this item

    Keywords

    Generalized Hyperbolic distribution Option pricing Incomplete market CAC 40 Stochastic discount factor Martingale correction;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finlet:v:7:y:2010:i:1:p:24-28. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/frl .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.