Luca Vincenzo Ballestra, Enzo D'Innocenzo, Christian Tezza
arXiv 18 Oct 2024 · Econometrics
arXiv:2410.14513 · PDF · DOI · OpenAlex · Extracted main text
Christoffersen, Jacobs, Ornthanalai, and Wang (2008) (CJOW) proposed an improved Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model for valuing European options, where the return volatility is comprised of two distinct components. Empirical studies indicate that the model developed by CJOW outperforms widely-used single-component GARCH models and provides a superior fit to options data than models that combine conditional heteroskedasticity with Poisson-normal jumps. However, a significant limitation of this model is that it allows the variance process to become negative. Oh and Park [2023] partially addressed this issue by developing a related model, yet the positivity of the volatility components is not guaranteed, both theoretically and empirically. In this paper we introduce a new GARCH model that improves upon the models by CJOW and Oh and Park [2023], ensuring the positivity of the return volatility. In comparison to the two earlier GARCH approaches, our novel methodology shows comparable in-sample performance on returns data and superior performance on S&P500 options data.
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The works this paper leans on most, across its whole bibliography — not restricted to papers in our corpus. Ranked by composite intensity, which combines how often a work is mentioned, how many sections mention it, and how much of that falls in the main text rather than the appendix.
| Reference | Intensity | Mentions | Sections | Main text | |
|---|---|---|---|---|---|
| 1 | D.H. Oh and Y.-H. Park (2023) GARCH option pricing with volatility derivatives | 1.000 | 11 | 4 | 100% |
| 2 | P. Christoffersen, K. Jacobs, C. Ornthanalai, and Y. Wang (2008) Option valuation with long-run and short-run volatility components | 1.000 | 9 | 5 | 100% |
| 3 | H-W Cheng, L-H Chang, C-L Lo, and J.T. Tsai (2023) Empirical performance of component GARCH models in pricing VIX term structure and VIX futures | 0.874 | 5 | 2 | 100% |
| 4 | G. Bormetti, F. Corsi, and A. Majewski (2015) Smile from the past: A general option pricing framework with multiple volatility and leverage components | 0.811 | 4 | 2 | 100% |
| 5 | S.L. Heston and S. Nandi (2000) A closed-form GARCH option valuation model | 0.811 | 4 | 2 | 100% |
| 6 | P. Christoffersen, K. Jacobs, and C. Ornthanalai (2012) Dynamic jump intensities and risk premiums: Evidence from S&P500 returns and options | 0.405 | 1 | 1 | 100% |
| 7 | F. Corsi, N. Fusari, and D. La Vecchia (2013) Realizing smiles: Options pricing with realized volatility | 0.405 | 1 | 1 | 100% |
| 8 | R.F. Engle and G. Lee (1999) A long-run and short-run component model of stock return volatility. In: Engle, R.F. and White, H., Eds., Cointegration, Causali… | 0.405 | 1 | 1 | 100% |
| 9 | L.V. Ballestra, E. D'Innocenzo, and A. Guizzardi (2023) Score-driven modeling with jumps: An application to S&P500 returns and options self | 0.405 | 1 | 1 | 100% |
| 10 | L.V. Ballestra, E. D'Innocenzo, and A. Guizzardi (2024) A new bivariate approach for modeling the interaction between stock volatility and interest rate: An application to S&P500 retur… self | 0.405 | 1 | 1 | 100% |
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