An empirical comparison of the performance of alternative option pricing models
- Gago García, Mónica
- Rubio Irigoyen, Gonzalo
- Ferreira García, Eva
- León Valle, Angel
ISSN: 0210-1521
Año de publicación: 2005
Volumen: 29
Número: 3
Páginas: 483-523
Tipo: Artículo
Otras publicaciones en: Investigaciones económicas
Resumen
This paper presents a comparison of alternative option pricing models based neither on jump-diffusion nor stochastic volatility data generating processes. We assume either a smooth volatility function of some previously defined explanatory variables or a model in which discrete-based observations can be employed to estimate both path-dependence volatility and the negative correlation between volatility and underlying returns. Moreover, we also allow for liquidity frictions to recognize that underlying markets may not be fully integrated. The simplest models tend to present a superior out-of sample performance and a better hedging ability, although the model with liquidity costs seems to display better in-sample behavior. However, none of the models seems to be able to capture the rapidly changing distribution of the underlying index return or the net buying pressure characterizing option markets