What We Can Learn from Pricing 139,879 Individual Stock Options

Posted: 20 May 2019

See all articles by Lars Stentoft

Lars Stentoft

Department of Economics, University of Western Ontario; Center for Interuniversity Research and Analysis on Organization (CIRANO); Aarhus University - CREATES

Date Written: December 21, 2011

Abstract

The GARCH framework has been used for option pricing with quite some success. While the initial work assumed conditional Gaussian innovations, recent contributions relax this assumption and allow for more flexible parametric specifications of the underlying distribution. However, until now the empirical applications have been limited to index options or options on only a few stocks and this using only few potential distributions and variance specifications. In this paper we test the GARCH framework on 30 stocks in the Dow Jones Industrial Average using two classical volatility specifications and 7 different underlying distributions. Our results provide clear support for using an asymmetric volatility specification together with non-Gaussian distribution, particularly of the Normal Inverse Gaussian type, and statistical tests show that this model is most frequently among the set of best performing models.

Keywords: American options, GARCH models, Model Confidence Set, Simulation

JEL Classification: C22, C53, G13

Suggested Citation

Stentoft, Lars, What We Can Learn from Pricing 139,879 Individual Stock Options (December 21, 2011). https://doi.org/10.3905/jod.2015.22.4.054. Available at SSRN: https://ssrn.com/abstract=1975779 or http://dx.doi.org/10.2139/ssrn.1975779

Lars Stentoft (Contact Author)

Department of Economics, University of Western Ontario ( email )

London, Ontario N6A 5B8
Canada

Center for Interuniversity Research and Analysis on Organization (CIRANO)

2020 rue University, 25th floor
Montreal H3C 3J7, Quebec
Canada

Aarhus University - CREATES

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

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