Download or read book Specification Tests of Calibrated Option Pricing Models written by Robert A. Jarrow and published by . This book was released on 2013 with total page 39 pages. Available in PDF, EPUB and Kindle. Book excerpt: In spite of the popularity of model calibration in finance, empirical researchers have put more emphasis on model estimation than on the equally important goodness-of-fit problem. This is due partly to the ignorance of modelers, and more to the ability of existing statistical tests to detect specification errors. In practice, models are often calibrated by minimizing the sum of squared difference between the modelled and actual observations. It is challenging to disentangle model error from estimation error in the residual series. To circumvent the difficulty, we study an alternative way of estimating the model by exact calibration. We argue that standard time series tests based on the exact approach can better reveal model misspecifications than the error minimizing approach. In the context of option pricing, we illustrate the usefulness of exact calibration in detecting model misspecification. Under heteroskedastic observation error structure, our simulation results shows that the Black-Scholes model calibrated by exact approach delivers more accurate hedging performance than that calibrated by error minimization.
Download or read book Tests of Option Pricing Models Using Transactions Data written by Mihir Bhattacharya and published by . This book was released on 1981 with total page 188 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Essays on the Specification Testing for Dynamic Asset Pricing Models written by Jaeho Yun and published by . This book was released on 2009 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of three essays on the subjects of specification testing on dynamic asset pricing models. In the first essay (with Yongmiao Hong), "A Simulation Test for Continuous-Time Models," we propose a simulation method to implement Hong and Li's (2005) transition density-based test for continuous-time models. The idea is to simulate a sequence of dynamic probability integral transforms, which is the key ingredient of Hong and Li's (2005) test. The proposed procedure is generally applicable whether or not the transition density of a continuous-time model has a closed form and is simple and computationally inexpensive. A Monte Carlo study shows that the proposed simulation test has very similar sizes and powers to the original Hong and Li's (2005) test. Furthermore, the performance of the simulation test is robust to the choice of the number of simulation iterations and the number of discretization steps between adjacent observations. In the second essay (with Yongmiao Hong), "A Specification Test for Stock Return Models," we propose a simulation-based specification testing method applicable to stochastic volatility models, based on Hong and Li (2005) and Johannes et al. (2008). We approximate a dynamic probability integral transform in Hong and Li' s (2005) density forecasting test, via the particle filters proposed by Johannes et al. (2008). With the proposed testing method, we conduct a comprehensive empirical study on some popular stock return models, such as the GARCH and stochastic volatility models, using the S&P 500 index returns. Our empirical analysis shows that all models are misspecified in terms of density forecast. Among models considered, however, the stochastic volatility models perform relatively well in both in- and out-of-sample. We also find that modeling the leverage effect provides a substantial improvement in the log stochastic volatility models. Our value-at-risk performance analysis results also support stochastic volatility models rather than GARCH models. In the third essay (with Yongmiao Hong), "Option Pricing and Density Forecast Performances of the Affine Jump Diffusion Models: the Role of Time-Varying Jump Risk Premia," we investigate out-of-sample option pricing and density forecast performances for the affine jump diffusion (AJD) models, using the S&P 500 stock index and the associated option contracts. In particular, we examine the role of time-varying jump risk premia in the AJD specifications. For comparison purposes, nonlinear asymmetric GARCH models are also considered. To evaluate density forecasting performances, we extend Hong and Li's (2005) specification testing method to be applicable to the famous AJD class of models, whether or not model-implied spot volatilities are available. For either case, we develop (i) the Fourier inversion of the closed-form conditional characteristic function and (ii) the Monte Carlo integration based on the particle filters proposed by Johannes et al. (2008). Our empirical analysis shows strong evidence in favor of time-varying jump risk premia in pricing cross-sectional options over time. However, for density forecasting performances, we could not find an AJD specification that successfully reconcile the dynamics implied by both time-series and options data.
Download or read book Specification Analysis of Option Pricing Models Based on Time Changed Levy Processes written by Jing-Zhi Huang and published by . This book was released on 2008 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: We analyze the specifications of option pricing models based on time-changed Levy processes. We classify option pricing models based on the sucture of the jump component in the underlying return process, the source of stochastic volatility, and the specification of the volatility process itself. Our estimation of a variety of model specifications indicates that to better capture the behavior of the Samp;P 500 index options, we must incorporate a high frequency jump component in the return process and generate stochastic volatilities from two different sources, the jump component and the diffusion component.
Download or read book Empirical Tests of Option Pricing Models written by Olesia Verchenko and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Maximum Likelihood Tests of Option Pricing Models written by Giovanni Barone-Adesi and published by . This book was released on 1985 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Some Economically Meaningful Option Model Calibration Performance Measures written by Craig A. Friedman and published by . This book was released on 2014 with total page 18 pages. Available in PDF, EPUB and Kindle. Book excerpt: The desire to more accurately calibrate option pricing models to liquid option prices has been an important driver of the growth of the option pricing literature and practice. However, the most commonly used model calibration accuracy metrics are not designed to reflect the economic consequences of trading based on model prices. To address this shortcoming, we derive, from first principles, in an idealized market setting, new, tractable, and economically meaningful, utility-based, measures of option pricing model calibration performance. We show that when pricing errors are “small,” our measures closely approximate popular percentage pricing error-based metrics. However, our measures can be quite different when model prices are smaller than they ought to be (which can happen when the option pricing model does not properly take into account fat-tailed asset return effects). We compare our measures with widely used metrics and show, via examples using SPX options data, that our new measures better inform us about the economic consequences of model pricing error and thereby better allow us to select among candidate option pricing models.
Download or read book Calibration Risk for Exotic Options written by Kai Detlefsen and published by . This book was released on 2017 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt: Option pricing models are calibrated to market data of plain vanillas by minimization of an error functional. From the economic viewpoint, there are several possibilities to measure the error between the market and the model. These different specifications of the error give rise to different sets of calibrated model parameters and the resulting prices of exotic options vary significantly. These price differences often exceed the usual profit margin of exotic options.We provide evidence for this calibration risk in a time series of DAX implied volatility surfaces from April 2003 to March 2004. We analyze in the Heston and in the Bates model factors influencing these price differences of exotic options and finally recommend an error functional. Moreover, we determine the model risk of these two stochastic volatility models for the time series and consider its relation to calibration risk.
Download or read book Model Specification and News Announcements written by Nathaniel Wiesendanger Shaw and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Empirical Testing of Real Option Pricing Models written by Laura J. Quigg and published by . This book was released on 1992 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Variance Forecasting Test of the Option Pricing Model written by University of British Columbia. Urban Land Economics Division and published by . This book was released on 1980 with total page 35 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Bond and Option Pricing Models written by Young Ho Eom and published by . This book was released on 1996 with total page 252 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Testing Option Pricing Models written by David Scott Bates and published by . This book was released on 1995 with total page 72 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper discusses the commonly used methods for testing option pricing models, including the Black-Scholes, constant elasticity of variance, stochastic volatility, and jump-diffusion models. Since options are derivative assets, the central empirical issue is whether the distributions implicit in option prices are consistent with the time series properties of the underlying asset prices. Three relevant aspects of consistency are discussed, corresponding to whether time series-based inferences and option prices agree with respect to volatility, changes in volatility, and higher moments. The paper surveys the extensive empirical literature on stock options, options on stock indexes and stock index futures, and options on currencies and currency futures
Download or read book Testing Option Pricing Models written by David S. Bates and published by . This book was released on 2010 with total page 75 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper discusses the commonly used methods for testing option pricing models, including the Black-Scholes, constant elasticity of variance, stochastic volatility, and jump-diffusion models. Since options are derivative assets, the central empirical issue is whether the distributions implicit in option prices are consistent with the time series properties of the underlying asset prices. Three relevant aspects of consistency are discussed, corresponding to whether time series-based inferences and option prices agree with respect to volatility, changes in volatility, and higher moments. The paper surveys the extensive empirical literature on stock options, options on stock indexes and stock index futures, and options on currencies and currency futures.
Download or read book Commemorative Guidebook to the First Field Conference written by and published by . This book was released on 1981* with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Tests of two option pricing models using German stock options market data from January 1979 through March 1983 written by S. Trautmann and published by . This book was released on 1983 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt:
