Implementation of the Bdt Model with Different Volatility Estimators: Applications to Eurodollar Futures Options

Posted: 23 Sep 2000

See all articles by Turan G. Bali

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

Ahmet K Karagozoglu

Hofstra University, Zarb School of Business; New York University (NYU) - Volatility and Risk Institute

Abstract

This paper concentrates on the effects of different class of volatility estimators in pricing interest rate sensitive options using the single-factor Black, Derman, and Toy [1990] model. We employ the moving average, such as constantly-weighted and exponentially-weighted moving average, and the time-series models, such as Generalized Autoregressive Conditional Heteroscedasticity (GARCH) and the integrated GARCH (IGARCH), in estimating the volatility of short rates. Empirical results, based on 4,228 estimated prices, indicate that valuation of Eurodollar futures options is sensitive to the volatility model used and the time-series models provide a more accurate representation of the underlying time-varying volatility structure than the moving average models.

JEL Classification: G13

Suggested Citation

Bali, Turan G. and Karagozoglu, Ahmet K, Implementation of the Bdt Model with Different Volatility Estimators: Applications to Eurodollar Futures Options. Available at SSRN: https://ssrn.com/abstract=236385

Turan G. Bali (Contact Author)

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

HOME PAGE: https://sites.google.com/a/georgetown.edu/turan-bali

Ahmet K Karagozoglu

Hofstra University, Zarb School of Business ( email )

Department of Finance
148 Hofstra University
Hempstead, NY 11549-1480
United States
(516) 463-5701 (Phone)
(718) 701-8331 (Fax)

HOME PAGE: http://sites.hofstra.edu/ahmet-karagozoglu

New York University (NYU) - Volatility and Risk Institute ( email )

44 West 4th Street
New York, NY 10012
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
1,859
PlumX Metrics