Advanced

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

Byström, Hans LU (2000) In Working Papers, Department of Economics, Lund University
Abstract
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... (More)
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 (Less)
Please use this url to cite or link to this publication:
author
organization
publishing date
type
Working Paper
publication status
published
subject
keywords
derivatives pricing, stochastic volatility, Fourie
in
Working Papers, Department of Economics, Lund University
issue
16
publisher
Department of Economics, Lund Universtiy
language
English
LU publication?
yes
id
f3dafb10-2296-4e7d-89ea-f8593bd5c16a (old id 1387606)
alternative location
http://swopec.hhs.se/lunewp/abs/lunewp2000_016.htm
date added to LUP
2009-04-20 12:27:26
date last changed
2016-04-16 08:37:20
@misc{f3dafb10-2296-4e7d-89ea-f8593bd5c16a,
  abstract     = {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},
  author       = {Byström, Hans},
  keyword      = {derivatives pricing,stochastic volatility,Fourie},
  language     = {eng},
  note         = {Working Paper},
  number       = {16},
  publisher    = {Department of Economics, Lund Universtiy},
  series       = {Working Papers, Department of Economics, Lund University},
  title        = {Stochastic Volatility and Pricing Bias in the Swedish OMX-Index Call Option Market},
  year         = {2000},
}