Post by Sapphire Capital on Jul 11, 2008 22:05:52 GMT 4
Generalized Parameter Functions for Option Pricing
PANAYIOTIS C. ANDREOU
University of Cyprus - Department of Public and Business Administration
CHRISTAKIS CHARALAMBOUS
University of Cyprus - Department of Public and Business Administration
SPIROS MARTZOUKOS
University of Cyprus - Department of Public and Business Administration; George Washington University - School of Business
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December 20, 2007
Abstract:
We extend the Deterministic Volatility Functions of Dumas et al. (1998) to provide a semi-parametric approach were an enhancement of the implied parameter values is used in the parametric option pricing models. We enhance not only volatility but also skewness and kurtosis. Empirical results using three years of S&P 500 index call option prices strongly support our approach which compares very favorably to stochastic volatility and jump models. The economic significance of the approach is tested in terms of hedging where the evaluation and estimation loss functions are aligned: hedging results when enhancing skewness and kurtosis parameters are significantly improved.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1099493_code656703.pdf?abstractid=1099493&mirid=2
PANAYIOTIS C. ANDREOU
University of Cyprus - Department of Public and Business Administration
CHRISTAKIS CHARALAMBOUS
University of Cyprus - Department of Public and Business Administration
SPIROS MARTZOUKOS
University of Cyprus - Department of Public and Business Administration; George Washington University - School of Business
--------------------------------------------------------------------------------
December 20, 2007
Abstract:
We extend the Deterministic Volatility Functions of Dumas et al. (1998) to provide a semi-parametric approach were an enhancement of the implied parameter values is used in the parametric option pricing models. We enhance not only volatility but also skewness and kurtosis. Empirical results using three years of S&P 500 index call option prices strongly support our approach which compares very favorably to stochastic volatility and jump models. The economic significance of the approach is tested in terms of hedging where the evaluation and estimation loss functions are aligned: hedging results when enhancing skewness and kurtosis parameters are significantly improved.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1099493_code656703.pdf?abstractid=1099493&mirid=2