Option Pricing with Anomalous Scaling and Infinite-State Switching Volatility

53 Pages Posted: 3 Jun 2013

See all articles by Fulvio Baldovin

Fulvio Baldovin

University of Padua

Massimiliano Caporin

University of Padua - Department of Statistical Sciences

Michele Caraglio

University of Padua

Attilio Stella

University of Padua

Marco Zamparo

Human Genetics Foundation

Date Written: May 30, 2013

Abstract

Volatility clustering, long-range dependence, non-Gaussianity and anomalous scaling are all well-known stylized facts of financial assets return dynamics. These elements have a relevant impact on the aptness of models for the pricing of options written on financial assets. We make us of a model developed in physics that captures the previously cited returns features. The model allows deriving closed form equations for option pricing. We present the model providing a financial interpretation of its components and discuss the parameters estimation. We then derive pricing equations and use them in an empirical application based on a major equity index option dataset.

Keywords: option pricing, anomalous scaling, Markov switching, GARCH

JEL Classification: C58, G13, C22, C51, C52, C53

Suggested Citation

Baldovin, Fulvio and Caporin, Massimiliano and Caraglio, Michele and Stella, Attilio and Zamparo, Marco, Option Pricing with Anomalous Scaling and Infinite-State Switching Volatility (May 30, 2013). Available at SSRN: https://ssrn.com/abstract=2273623 or http://dx.doi.org/10.2139/ssrn.2273623

Fulvio Baldovin

University of Padua ( email )

Via 8 Febbraio, 2
Padova, Vicenza 35122
Italy

Massimiliano Caporin (Contact Author)

University of Padua - Department of Statistical Sciences ( email )

Via Battisti, 241
Padova, 35121
Italy

Michele Caraglio

University of Padua ( email )

Via 8 Febbraio 1848, 2
Padova, Vicenza 35122
Italy

Attilio Stella

University of Padua ( email )

Via 8 Febbraio, 2
Padova, Vicenza 35122
Italy

Marco Zamparo

Human Genetics Foundation ( email )

Via Nizza 52
Torino
Italy

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