Discrete time option pricing with flexible volatility estimation


By extending the GARCH option pricing model of Duan (1995) to more flexible volatility estimation it is shown that the prices of out-of-the-money options strongly depend on volatility features such as asymmetry. Results are provided for the properties of the stationary pricing distribution in the case of a threshold GARCH model. For a stock index series with a pronounced leverage effect, simulated threshold GARCH option prices are substantially closer to observed market prices than the Black/Scholes and simulated GARCH prices.

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Manuscript received: August 1997; final version received: April 1999

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Härdle, W., Hafner, C. Discrete time option pricing with flexible volatility estimation. Finance Stochast 4, 189–207 (2000). https://doi.org/10.1007/s007800050011

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  • Key words:Option pricing, volatility, GARCH, threshold GARCH, leverage effect
  • JEL Classification:C15, C22, G13
  • Mathematics Subject Classification (1991):90A09, 60H10