Recovering Stochastic Processes from Option Prices

Jackwerth, Jens; Rubinstein, Mark

Recovering Stochastic Processes from Option Prices

Dateien

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Datum

2012

Autor:innen

Jackwerth, Jens

Rubinstein, Mark

Open Access-Veröffentlichung

Open Access Green

Sammlungen

Wirtschaftswissenschaften

Publikationstyp

Beitrag zu einem Sammelband

Publikationsstatus

Published

Erschienen in

BATTEN, Jonathan A., ed., Niklas WAGNER, ed.. Derivative Securities Pricing and Modelling. Bradford: Emerald, 2012, pp. 123-154. Contemporary Studies in Economic and Financial Analysis. 94. ISBN 978-1-78052-616-4. Available under: doi: 10.1108/S1569-3759(2012)0000094008

Zusammenfassung

How do stock prices evolve over time? The standard assumption of geometric Brownian motion, questionable as it has been right along, is even more doubtful in light of the stock market crash of 1987 and the subsequent prices of U.S. index options. With the development of rich and deep markets in these options, it is now possible to use options prices to make inferences about the risk-neutral stochastic process governing the underlying index. We compare the ability of models including Black-Scholes, naïve volatility smile predictions of traders, constant elasticity of variance, displaced diffusion, jump diffusion, stochastic volatility, and implied binomial trees to explain otherwise identical observed option prices that differ by strike prices, times-toexpiration, or times. The latter amounts to examining predictions of future implied volatilities.

Certain naïve predictive models used by traders seem to perform best, although some academic models are not far behind. We find that the better performing models all incorporate the negative correlation between index level and volatility. Further improvements to the models seem to require predicting the future at-the-money implied volatility. However, an “efficient markets result” makes these forecasts difficult, and improvements to the option pricing models might then be limited.

Fachgebiet (DDC)

330 Wirtschaft

Zitieren

ISO 690

JACKWERTH, Jens, Mark RUBINSTEIN, 2012. Recovering Stochastic Processes from Option Prices. In: BATTEN, Jonathan A., ed., Niklas WAGNER, ed.. Derivative Securities Pricing and Modelling. Bradford: Emerald, 2012, pp. 123-154. Contemporary Studies in Economic and Financial Analysis. 94. ISBN 978-1-78052-616-4. Available under: doi: 10.1108/S1569-3759(2012)0000094008

BibTex

@incollection{Jackwerth2012Recov-36295,
  year={2012},
  doi={10.1108/S1569-3759(2012)0000094008},
  title={Recovering Stochastic Processes from Option Prices},
  number={94},
  isbn={978-1-78052-616-4},
  publisher={Emerald},
  address={Bradford},
  series={Contemporary Studies in Economic and Financial Analysis},
  booktitle={Derivative Securities Pricing and Modelling},
  pages={123--154},
  editor={Batten, Jonathan A. and Wagner, Niklas},
  author={Jackwerth, Jens and Rubinstein, Mark}
}

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