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A GARCH Option Pricing Model with Filtered Historical Simulation

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Simulating Security Returns: A Filtered Historical Simulation Approach

Abstract

We propose a new method for pricing options based on GARCH models with filtered historical innovations. In an incomplete market framework, we allow for different distributions of historical and pricing return dynamics, which enhances the model’s flexibility to fit market option prices. An extensive empirical analysis based on S&P 500 Index options shows that our model outperforms other competing GARCH pricing models and ad hoc Black-Scholes models.

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Authors
  1. Giovanni Barone Adesi
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  2. Robert F. Engle
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  3. Loriano Mancini
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Editor information

Editors and Affiliations

  1. University of Italian Switzerland, Switzerland

    Giovanni Barone Adesi (Professor) (Professor)

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© 2014 Giovanni Barone Adesi

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Adesi, G.B., Engle, R.F., Mancini, L. (2014). A GARCH Option Pricing Model with Filtered Historical Simulation. In: Adesi, G.B. (eds) Simulating Security Returns: A Filtered Historical Simulation Approach. Palgrave Pivot, New York. https://doi.org/10.1057/9781137465559_4

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