GARCH Option Valuation: Theory and Evidence

58 Pages Posted: 8 May 2012 Last revised: 22 Aug 2013

Peter Christoffersen

University of Toronto - Rotman School of Management; Copenhagen Business School; University of Aarhus - CREATES

Kris Jacobs

University of Houston - C.T. Bauer College of Business

Chayawat Ornthanalai

University of Toronto - Rotman School of Management

Date Written: June 13, 2013

Abstract

We survey the theory and empirical evidence on GARCH option valuation models. We provide an overview of different functional forms for the volatility dynamic, multifactor models, nonnormal innovation distributions and valuation techniques. We also discuss alternative pricing kernels used for risk neutralization, various strategies for empirical implementation, and the links between GARCH and stochastic volatility models. In the appendix we provide Matlab computer code for option pricing via Monte Carlo simulation for nonaffine models as well as via Fourier inversion for affine models.

Keywords: GARCH, option valuation

JEL Classification: G13

Suggested Citation

Christoffersen, Peter and Jacobs, Kris and Ornthanalai, Chayawat, GARCH Option Valuation: Theory and Evidence (June 13, 2013). Available at SSRN: https://ssrn.com/abstract=2054859 or http://dx.doi.org/10.2139/ssrn.2054859

Peter Christoffersen (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5P 3C4
Canada
416-946-5511 (Phone)

HOME PAGE: http://www.christoffersen.com

Copenhagen Business School

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

University of Aarhus - CREATES

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

Kris Jacobs

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

Chayawat Ornthanalai

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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