A GARCH Option Model with Variance-Dependent Pricing Kernel

@inproceedings{Heston2011AGO,
  title={A GARCH Option Model with Variance-Dependent Pricing Kernel},
  author={Steven L. Heston and Kris Jacobs},
  year={2011}
}
We develop a GARCH option model with a variance premium by combining the HestonNandi (2000) dynamic with a new pricing kernel. While the pricing kernel is monotonic in the stock return and in variance, its projection onto the stock return is nonmonotonic. A negative variance premium makes it appear U-shaped. We present new semi-parametric evidence to con…rm this U-shaped relationship between the risk-neutral and physical probability densities. The new pricing kernel substantially improves our… CONTINUE READING

Figures and Tables from this paper.

Citations

Publications citing this paper.
SHOWING 1-3 OF 3 CITATIONS

References

Publications referenced by this paper.