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Implementation of Heston-Nandi GARCH model on OMXS30

Sjögren, Oscar LU and Bengtsson Ekström, Jakob LU (2015) NEKH01 20142
Department of Economics
Abstract
This paper evaluates the performance of Heston and Nandi’s closed form option pricing model (2000) on the OMXS30 (Swedish stock index), pre and post the financial crisis. The main purpose is to investigate if the more realistic assumptions of Heston and Nandi yield more accurate price estimates, than the computationally more simplistic Black-Scholes model. Both periods are evaluated in-sample and out-of-sample and the parameters of the model are generated by Maximum Likelihood Estimation. The out-of-sample analysis reveals some mixed results, but put options are in general more accurately estimated than call options, especially out-of-the money. Some periods experience large pricing errors, due to poor parameter estimates. One natural... (More)
This paper evaluates the performance of Heston and Nandi’s closed form option pricing model (2000) on the OMXS30 (Swedish stock index), pre and post the financial crisis. The main purpose is to investigate if the more realistic assumptions of Heston and Nandi yield more accurate price estimates, than the computationally more simplistic Black-Scholes model. Both periods are evaluated in-sample and out-of-sample and the parameters of the model are generated by Maximum Likelihood Estimation. The out-of-sample analysis reveals some mixed results, but put options are in general more accurately estimated than call options, especially out-of-the money. Some periods experience large pricing errors, due to poor parameter estimates. One natural extension would thus be to perform the study by estimating the parameters by the Nonlinear Least Squares method, indeed implemented by Heston and Nandi. (Less)
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author
Sjögren, Oscar LU and Bengtsson Ekström, Jakob LU
supervisor
organization
course
NEKH01 20142
year
type
M2 - Bachelor Degree
subject
keywords
Financial Crisis, Heston and Nandi, HN-GARCH, OMXS30, Option Pricing.
language
English
id
5045638
date added to LUP
2015-02-19 14:06:44
date last changed
2015-02-19 14:06:44
@misc{5045638,
  abstract     = {This paper evaluates the performance of Heston and Nandi’s closed form option pricing model (2000) on the OMXS30 (Swedish stock index), pre and post the financial crisis. The main purpose is to investigate if the more realistic assumptions of Heston and Nandi yield more accurate price estimates, than the computationally more simplistic Black-Scholes model. Both periods are evaluated in-sample and out-of-sample and the parameters of the model are generated by Maximum Likelihood Estimation. The out-of-sample analysis reveals some mixed results, but put options are in general more accurately estimated than call options, especially out-of-the money. Some periods experience large pricing errors, due to poor parameter estimates. One natural extension would thus be to perform the study by estimating the parameters by the Nonlinear Least Squares method, indeed implemented by Heston and Nandi.},
  author       = {Sjögren, Oscar and Bengtsson Ekström, Jakob},
  keyword      = {Financial Crisis,Heston and Nandi,HN-GARCH,OMXS30,Option Pricing.},
  language     = {eng},
  note         = {Student Paper},
  title        = {Implementation of Heston-Nandi GARCH model on OMXS30},
  year         = {2015},
}