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Research Article
The finite sample properties of the GARCH option pricing model
Article first published online: 4 APR 2007
DOI: 10.1002/fut.20241
© 2007 Wiley Periodicals, Inc.
1096-9934/asset/cover.gif?v=1&s=127934b27fe5373f5a82393587f60fd7f50e7c6f "Journal of Futures Markets")
Additional Information
How to Cite
Dotsis, G. and Markellos, R. N. (2007), The finite sample properties of the GARCH option pricing model. Journal of Futures Markets, 27: 599–615. doi: 10.1002/fut.20241
Publication History
- Issue published online: 4 APR 2007
- Article first published online: 4 APR 2007
- Manuscript Accepted:
- Manuscript Received:
- Abstract
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Abstract
The authors explore the finite sample properties of the generalized autoregressive conditional heteroscedasticity (GARCH) option pricing model proposed by S. L. Heston and S. Nandi (2000). Simulation results show that the maximum likelihood estimators of the GARCH process may contain substantial estimation biases, even when samples as large as 3,000 observations are used. However, it was found that these biases cause significant mispricings only for short-term, out-of-the-money options. It is shown that, given an adequate estimation sample, this bias can be reduced considerably by employing the jackknife resampling method. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:599–615, 2007