Abstract
This paper empirically examines the performance of Black-Scholes and Garch-M call option pricing models using call options data for British Pounds, Swiss Francs and Japanese Yen. The daily exchange rates exhibit an overwhelming presence of volatility clustering, suggesting that a richer model with ARCH/GARCH effects might have a better fit with actual prices. We perform dominant tests and calculate average percent mean squared errors of model prices. Our findings indicate that the Black-Scholes model outperforms the GARCH models. An implication of this result is that participants in the currency call options market do not seem to price volatility clusters in the underlying process.
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Harikumar, T., de Boyrie, M.E. & Pak, S.J. Evaluation of Black-Scholes and GARCH Models Using Currency Call Options Data. Review of Quantitative Finance and Accounting 23, 299–312 (2004). https://doi.org/10.1023/B:REQU.0000049318.78363.3c
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DOI: https://doi.org/10.1023/B:REQU.0000049318.78363.3c