An Option Pricing Formula for the GARCH Diffusion Model

We derive analytically the first four conditional moments of the integrated variance implied by the GARCH diffusion process. From these moments we obtain an analytical closed-form approximation formula to price European options under the GARCH diffusion model. Using Monte Carlo simulations, we show that this approximation formula is accurate for a large set of reasonable parameters. Finally, we use the closed-form option pricing solution to shed light on the qualitative properties of implied volatility surfaces induced by GARCH diffusion models.


Published in:
Computational Statistics and Data Analysis, 49, 287-310
Year:
2005
Publisher:
Elsevier
ISSN:
0167-9473
Laboratories:




 Record created 2010-04-24, last modified 2018-03-17

n/a:
Download fulltext
PDF

Rate this document:

Rate this document:
1
2
3
 
(Not yet reviewed)