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

Byström, Hans LU (2000) In Working Papers
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/Preprint
publication status
published
subject
keywords
derivatives pricing, stochastic volatility, Fourie
in
Working Papers
issue
2000:16
publisher
Department of Economics, Lund University
language
English
LU publication?
yes
id
f3dafb10-2296-4e7d-89ea-f8593bd5c16a (old id 1387606)
date added to LUP
2016-04-04 10:58:55
date last changed
2025-04-04 15:29:41
@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}},
  keywords     = {{derivatives pricing; stochastic volatility; Fourie}},
  language     = {{eng}},
  note         = {{Working Paper}},
  number       = {{2000:16}},
  publisher    = {{Department of Economics, Lund University}},
  series       = {{Working Papers}},
  title        = {{Stochastic Volatility and Pricing Bias in the Swedish OMX-Index Call Option Market}},
  url          = {{https://lup.lub.lu.se/search/files/195339987/WP00_16.pdf}},
  year         = {{2000}},
}