A Stochastic Volatility Model With Realized Measures for Option Pricing
Bibliographic Data
| ID | 19420019 |
|---|---|
| Authors | Giacomo Bormetti (0000-0003-3542-2505, University of Bologna), Roberto Casarin (0000-0003-1746-9190, Ca' Foscari University of Venice), Fulvio Corsi (0000-0003-2683-4479, University of Pisa), Giulia Livieri (0000-0002-3777-7329, Scuola Normale Superiore, Piazza dei Cavalieri, 7, 56126, Pisa, Italy ()) |
| Year | 2020 |
| Volume | 38 |
| Issue | 4 |
| Pages | 856-871 |
| Publication date | 2020-10-01 |
| Open Access | No |
| Type | ARTICLE |
| Venue | Journal of Business and Economic Statistics (JOURNAL) |
| Journal identifiers | ISSN: 0735-0015 • E-ISSN: 1537-2707 |
| Publisher | Informa UK Limited (PUBLISHER • GB) |
| DOI | 10.1080/07350015.2019.1604371 |
| OpenAlex | W2939489631 |
| Language | EN |
| References cited | 63 |
Based on the fact that realized measures of volatility are affected by measurement errors, we introduce a new family of discrete-time stochastic volatility models having two measurement equations relating both observed returns and realized measures to the latent conditional variance. A semi-analytical option pricing framework is developed for this class of models. In addition, we provide analytical filtering and smoothing recursions for the basic specification of the model, and an effective MCMC algorithm for its richer variants. The empirical analysis shows the effectiveness of filtering and smoothing realized measures in inflating the latent volatility persistence—the crucial parameter in pricing Standard and Poor’s 500 Index options
Art · Econometrics · Economics · Humanities · Keynesian economics · Schools of economic thought · Complex Systems and Time Series Analysis · Financial Risk and Volatility Modeling · Stochastic processes and financial applications
| Highly cited | No |
|---|