An Application of Closed-Form GARCH Option Pricing Model to FTSE 100 Options and Volatilities

• Main Authors: Ming-Da Chen, 陳明達
• Other Authors: 蘇永成
• Format: Others
• Language: en_US
• Published: 2006
• Online Access: http://ndltd.ncl.edu.tw/handle/37555389543418927278

碩士 === 國立臺灣大學 === 財務金融學研究所 === 94 === Many empirical researches have indicated that the Black-Scholes option pricing model demonstrates systematic biases due to some unreasonable assumptions. In practice, Black-Scholes implied volatilities tend to differ across exercise prices and time to maturities. For conquering the shortcoming, many researchers have devoted themselves to creating new option pricing model. In this article, we test the pricing efficiency of Heston and Nandi GARCH (HN GARCH) model in the FTSE 100 Index option market. As the benchmark model do we choose the Ad Hoc Black-Scholes model of Dumas, Flemming and Whaley (1998) which use a separate implied volatility for each option to fit to the smirk/smile in implied volatilities. We find that the HN GARCH has smaller valuation errors than ad hoc BS model both in-sample and out-of-sample.