| Article ID | Journal | Published Year | Pages | File Type |
|---|---|---|---|---|
| 10327821 | Computational Statistics & Data Analysis | 2005 | 24 Pages |
Abstract
The first four conditional moments of the integrated variance implied by the GARCH diffusionprocess are derived analytically. Based on these moments and on a power series method an analytical approximation formula to price European options under the GARCH diffusion model is obtained. Monte Carlo simulations show that this approximation formula up to order three is accurate for a large set of reasonable parameters and highlight potential instabilities of the fourth term. Finally, the closed-form approximation formula is used to shed light on the qualitative properties of implied volatility surfaces induced by GARCH diffusion models.
Related Topics
Physical Sciences and Engineering
Computer Science
Computational Theory and Mathematics
Authors
Giovanni Barone-Adesi, Henrik Rasmussen, Claudia Ravanelli,