Exploring Option Pricing and Hedging via Volatility Asymmetry

16 Pages Posted: 7 Aug 2015 Last revised: 2 Apr 2019

See all articles by Isabel Casas

Isabel Casas

University of Southern Denmark; Basque Center for Applied Mathematics

Helena Veiga

Universidad Carlos III de Madrid - Department of Statistics and Econometrics

Date Written: August 19, 2015

Abstract

This paper evaluates the application of two well-known asymmetric stochastic volatility (ASV) models to option price forecasting and dynamic delta hedging. They are specified in discrete time in contrast to the classical stochastic volatility (SV) models used in option pricing. There is some related literature, but little is known about the empirical implications of volatility asymmetry on option pricing. The objectives of this paper are to estimate ASV option pricing models using a Bayesian approach unknown in this type of literature, and to investigate the effect of volatility asymmetry on option pricing for different size equity sectors and periods of volatility. Using the S&P MidCap 400 and S&P 500 European call option quotes, results show that volatility asymmetry benefits the accuracy of option price forecasting and hedging cost effectiveness in the large-cap equity sector. However, ASV models do not improve the option price forecasting and dynamic hedging in the mid-cap equity sector.

Keywords: Delta Hedging; Option Pricing; Stochastic Volatility; Volatility Asymmetry

JEL Classification: C22; C51; C58

Suggested Citation

Casas, Isabel and Veiga, Helena, Exploring Option Pricing and Hedging via Volatility Asymmetry (August 19, 2015). Available at SSRN: https://ssrn.com/abstract=2640152

Isabel Casas (Contact Author)

University of Southern Denmark ( email )

Campusvej 55
DK-5230 Odense, 5000
Denmark

Basque Center for Applied Mathematics ( email )

Mazarredo, 14
Bilbao, Bizkaia 48603
Spain

Helena Veiga

Universidad Carlos III de Madrid - Department of Statistics and Econometrics ( email )

c/ Madrid 126
Getafe (Madrid), 28903
Spain

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