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Stochastic Volatility and Pricing Bias in the Swedish OMX-Index Call Option Market

In English

Författare

Summary, in English

This paper investigates the pricing bias in the Swedish OMX-Index Option market and how a stochastic volatility affects European call option prices. The market is purely European and without dividends for the period studied. A CIR square-root process for the volatility is estimated with non-linear least square minimization, and stochastic volatility option prices are calculated through Fourier-Inversion. These call option prices are compared to Black-Scholes prices as well as observed market prices, and a well-defined bias structure between Stochastic Volatility prices and Black-Scholes prices is observed. With a dynamic hedging scheme, I demonstrate larger (ex ante) profits, excluding transaction costs, for traders using the stochastic volatility model rather than the Black-Scholes model

Publiceringsår

2000

Språk

Engelska

Publikation/Tidskrift/Serie

Working Papers

Issue

2000:16

Dokumenttyp

Working paper

Förlag

Department of Economics, Lund University

Ämne

  • Economics

Nyckelord

  • derivatives pricing
  • stochastic volatility
  • Fourie

Aktiv

Published