Please use this identifier to cite or link to this item: http://scholarbank.nus.edu.sg/handle/10635/45252
Title: Pricing American options with stochastic volatility: Evidence from S&P 500 futures options
Authors: Lim, K.G. 
Guo, X. 
Issue Date: 2000
Source: Lim, K.G.,Guo, X. (2000). Pricing American options with stochastic volatility: Evidence from S&P 500 futures options. Journal of Futures Markets 20 (7) : 625-659. ScholarBank@NUS Repository.
Abstract: This article is the first attempt to test empirically a numerical solution to price American options under stochastic volatility. The model allows for a mean-reverting stochastic-volatility process with non-zero risk premium for the volatility risk and correlation with the underlying process. A general solution of risk-neutral probabilities and price movements is derived, which avoids the common negative-probability problem in numerical-option pricing with stochastic volatility. The empirical test shows clear evidence supporting the occurrence of stochastic volatility. The stochastic-volatility model outperforms the constant-volatility model by producing smaller bias and better goodness of fit in both the in-sample and out-of-sample test. It not only eliminates systematic moneyness bias produced by the constant-volatility model, but also has better prediction power. In addition, both models perform well in the dynamic intraday hedging test. However, the constant-volatility model seems to have a slightly better hedging effectiveness. The profitability test shows that the stochastic volatility is able to capture statistically significant profits while the constant volatility model produces losses. © 2000 John Wiley & Sons, Inc.
Source Title: Journal of Futures Markets
URI: http://scholarbank.nus.edu.sg/handle/10635/45252
ISSN: 02707314
Appears in Collections:Staff Publications

Show full item record
Files in This Item:
There are no files associated with this item.

Page view(s)

156
checked on Dec 15, 2017

Google ScholarTM

Check


Items in DSpace are protected by copyright, with all rights reserved, unless otherwise indicated.