DMCA
Index Option Pricing Models with Stochastic Volatility and Stochastic Interest Rates (2000)
| Citations: | 11 - 0 self |
BibTeX
@MISC{Jiang00indexoption,
author = {George J. Jiang and Pieter J. van der Sluis},
title = {Index Option Pricing Models with Stochastic Volatility and Stochastic Interest Rates},
year = {2000}
}
Share
 |
 |
 |
 |
||
OpenURL
Abstract
This paper specifies a multivariate stochastic volatility (SV) model for the S&P500 index and spot interest rate processes. We first estimate the multivariate SV model via the efficient method of moments (EMM) technique based on observations of underlying state variables, and then investigate the respective effects of stochastic interest rates, stochastic volatility, and asymmetric S&P500 index returns on option prices. We compute option prices using both reprojected underlying historical volatilities and the implied risk premium of stochastic volatility to gauge each model's performance through direct comparison with observed market option prices on the index. Our major empirical findings are summarized as follows. First, while allowing for stochastic volatility can reduce the pricing errors and allowing for asymmetric volatility or "leverage effect" does help to explain the skewness of the volatility "smile", allowing for stochastic interest rates has minimal impact on o...
Keyphrases
stochastic volatility stochastic interest rate index option pricing model option price observed market option price asymmetric volatility minimal impact leverage effect multivariate stochastic volatility volatility smile spot interest rate process underlying historical volatility major empirical finding implied risk premium pricing error efficient method state variable p500 index direct comparison asymmetric p500 index return respective effect multivariate sv model
