GARCH Option Valuation: Theory and Evidence
58 Pages Posted: 8 May 2012 Last revised: 22 Aug 2013
Date Written: June 13, 2013
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
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