Please use this identifier to cite or link to this item: https://scholarbank.nus.edu.sg/handle/10635/45252
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dc.titlePricing American options with stochastic volatility: Evidence from S&P 500 futures options
dc.contributor.authorLim, K.G.
dc.contributor.authorGuo, X.
dc.date.accessioned2013-10-11T08:25:23Z
dc.date.available2013-10-11T08:25:23Z
dc.date.issued2000
dc.identifier.citationLim, 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.
dc.identifier.issn02707314
dc.identifier.urihttp://scholarbank.nus.edu.sg/handle/10635/45252
dc.description.abstractThis 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.
dc.sourceScopus
dc.typeArticle
dc.contributor.departmentCENTRE FOR FINANCIAL ENGINEERING
dc.contributor.departmentFINANCE & ACCOUNTING
dc.description.sourcetitleJournal of Futures Markets
dc.description.volume20
dc.description.issue7
dc.description.page625-659
dc.identifier.isiutNOT_IN_WOS
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