Evaluating Index Options under Habit Formation

• Main Authors: Ting-chih Chen, 陳亭之
• Other Authors: Wen-i Chuang
• Format: Others
• Language: zh-TW
• Published: 2009
• Online Access: http://ndltd.ncl.edu.tw/handle/88292057594295508211

碩士 === 國立臺灣科技大學 === 財務金融研究所 === 97 === When evaluating index options, most literatures assume the volatility to be constant, the GARCH process, the stochastic volatility process, etc. However, there is no one considering the relationship between the volatility and the stock market is closely related with the macroeconomic, for example, the volatility of stock market is relatively low in a boom and becomes relatively high in a recession. This phenomenon is the countercyclical variation of stock market volatility. For this reason, the goal of this paper is to develop a model to evaluate index options based on the consumption-based asset pricing model with habit formation in Campbell and Cochrance (1999), in which the relationship between the volatility of the stock market and the business cycle is considered. Moreover, the relationship between the risk-free interest rate and the business cycle is also taken into account, thereby affecting the value of index options. Empirical results on S&P500 index option shows that the option value derived in our model are more close to the actual market price than the Black-Scholes model which employs the constant volatility assumption.