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GARCH Option Valuation: Theory and Evidence

Author

Listed:
  • Peter Christoffersen

    (University of Toronto - Rotman School of Management and CREATES)

  • Kris Jacobs

    (University of Houston and Tilburg University)

  • Chayawat Ornthanalai

    (Georgia Institute of Technology)

Abstract
We survey the theory and empirical evidence on GARCH option valuation models. Our treatment includes the range of functional forms available for the volatility dynamic, multifactor models, nonnormal shock distributions as well as style of pricing kernels typically used. Various strategies for empirical implementation are laid out and we also discuss the links between GARCH and stochastic volatility models. In the appendix we provide Matlab computer code for option pricing via Monte Carlo simulation for nonaffine models as well as Fourier inversion for affine models.

Suggested Citation

  • Peter Christoffersen & Kris Jacobs & Chayawat Ornthanalai, 2012. "GARCH Option Valuation: Theory and Evidence," CREATES Research Papers 2012-50, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:create:2012-50
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    File URL: https://repec.econ.au.dk/repec/creates/rp/12/rp12_50.pdf
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    References listed on IDEAS

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    2. Simon Lalancette & Jean†Guy Simonato, 2017. "The Role of the Conditional Skewness and Kurtosis in VIX Index Valuation," European Financial Management, European Financial Management Association, vol. 23(2), pages 325-354, March.

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    More about this item

    Keywords

    GARCH; option valuation.;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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