Review of Quantitative Finance and Accounting

, Volume 40, Issue 1, pp 171–188 | Cite as

Is the realized volatility good for option pricing during the recent financial crisis?

  • Yow-Jen Jou
  • Chih-Wei Wang
  • Wan-Chien Chiu
Original Research


The contributions of this paper are threefold. The first contribution is the proposed logarithmic HAR (log-HAR) option-pricing model, which is more convenient compared with other option pricing models associated with realized volatility in terms of simpler estimation procedure. The second contribution is the test of the empirical implications of heterogeneous autoregressive model of the realized volatility (HAR)-type models in the S&P 500 index options market with comparison of the non-linear asymmetric GARCH option-pricing model, which is the best model in pricing options among generalized autoregressive conditional heteroskedastic-type models. The third contribution is the empirical analysis based on options traded from July 3, 2007 to December 31, 2008, a period covering a recent financial crisis. Overall, the HAR-type models successfully predict out-of-sample option prices because they are based on realized volatilities, which are closer to the expected volatility in financial markets. However, mixed results exist between the log-HAR and the heterogeneous auto-regressive gamma models in pricing options because the former is better than the latter in times of turmoil, whereas it is worse during the rather stable periods.


Realized volatility Log-HAR HAR NGARCH Out-of-sample pricing performance Option pricing 

JEL Classification

G15 G17 C15 C22 


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Copyright information

© Springer Science+Business Media, LLC 2012

Authors and Affiliations

  1. 1.Department of Information and Finance Management, Graduate Institute of FinanceNational Chiao Tung UniversityHsinchuTaiwan, ROC
  2. 2.Department of Business Administration and Quantitative MethodsUniversidad Carlos III de MadridGetafeSpain

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