An empirical investigation of the GARCH option pricing model: Hedging performance
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AbstractIn this article, we study the empirical performance of the GARCH option pricing model relative to the ad hoc Black-Scholes (BS) model of Dumas, Fleming, and Whaley. Specifically, we investigate the empirical performance of the option pricing model based on the exponential GARCH (EGARCH) process of Nelson. Using S&P 500 options data, we find that the EGARCH model performs better than the ad hoc BS model both in terms of in-sample valuation and out-of-sample forecasting. However, the superiority of out-of-sample performance EGARCH model over the ad hoc BS model is small and insignificant except in the case of deep-out-of-money put options. The out-performance diminishes as one lengthens the forecasting horizon. Interestingly, we find that the more complicated EGARCH model performs worse than the ad hoc BS model in hedging, irrespective of moneyness categories and hedging horizons. For at-the-money and out-of-the-money put options, the underperformance of the EGARCH model in hedging is statistically significant. (C) 2003 Wiley Periodicals, Inc.
All Author(s) ListYung HHM, Zhang H
Name of Conference13th Annual Asia-Pacific Futures Research Symposium/International Conference on Derivatives and Risk Management
Start Date of Conference27/02/2003
End Date of Conference28/02/2003
Place of ConferenceSHANGHAI
Journal nameJournal of Futures Markets
Year2003
Month12
Day1
Volume Number23
Issue Number12
PublisherJOHN WILEY & SONS INC
Pages1191 - 1207
ISSN0270-7314
eISSN1096-9934
LanguagesEnglish-United Kingdom
Web of Science Subject CategoriesBusiness & Economics; Business, Finance; BUSINESS, FINANCE

Last updated on 2021-24-01 at 01:32