Realizing smiles: Options pricing with realized volatility
Journal
Journal of Financial Economics
ISSN
0304-405X
ISSN-Digital
1879-2774
Type
journal article
Date Issued
2013-02
Author(s)
Abstract
We develop a discrete-time stochastic volatility option pricing model exploiting the information contained in the Realized Volatility (RV), which is used as a proxy of the unobservable log-return volatility. We model the RV dynamics by a simple and effective long-memory process, whose parameters can be easily estimated using historical data. Assuming an exponentially affine stochastic discount factor, we obtain a fully analytic change of measure. An empirical analysis of Standard and Poor's 500 index options illustrates that our model outperforms competing time-varying and stochastic volatility option pricing models.
Language
English
Keywords
High-frequency
Realized volatility
Option pricing
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Elsevier
Publisher place
Amsterdam
Volume
107
Number
2
Start page
284
End page
304
Pages
21
Subject(s)
Division(s)
Eprints ID
229748