GARCH vs. stochastic volatility: Option pricing and risk management

@inproceedings{Lehar2002GARCHVS,
  title={GARCH vs. stochastic volatility: Option pricing and risk management},
  author={Alfred Lehar and Martin Scheicher and Christian Schittenkopf},
  year={2002}
}
In this paper we compare the out-of-sample performance of two common extensions of the Black–Scholes option pricing model, namely GARCH and stochastic volatility (SV). We calibrate the three models to intraday FTSE 100 option prices and apply two sets of performance criteria, namely out-of-sample valuation errors and Value-at-Risk (VaR) oriented measures. When we analyze the fit to observed prices, GARCH clearly dominates both SV and the benchmark Black–Scholes model. However, the predictions… CONTINUE READING
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