Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5095928 | Journal of Econometrics | 2015 | 32 Pages |
Abstract
Volatility clustering, long-range dependence, and non-Gaussian scaling are stylized facts of financial assets dynamics. They are ignored in the Black & Scholes framework, but have a relevant impact on the pricing of options written on financial assets. Using a recent model for market dynamics which adequately captures the above stylized facts, we derive closed form equations for option pricing, obtaining the Black & Scholes as a special case. By applying our pricing equations to a major equity index option dataset, we show that inclusion of stylized features in financial modelling moves derivative prices about 30% closer to the market values without the need of calibrating models parameters on available derivative prices.
Related Topics
Physical Sciences and Engineering
Mathematics
Statistics and Probability
Authors
Fulvio Baldovin, Massimiliano Caporin, Michele Caraglio, Attilio L. Stella, Marco Zamparo,