An Empirical Investigation of the Market for Comex Gold Futures Options

Authors

  • WARREN BAILEY

    Academic Faculty of FinanceSearch for more papers by this author
    • Academic Faculty of Finance, The Ohio State University. I thank Jim Bodurtha, Bob Geske, David Hirshleifer, Francis Longstaff, Tony Sanders, Walter Torous, and the referee, Bob Whaley, for helpful discussions and comments on earlier drafts.

ABSTRACT

Option-pricing models that assume a constant interest rate may misprice futures options if the interest rate fluctuates significantly or if the price of the underlying asset is correlated with the interest rate. The futures option-pricing model of Ramaswamy and Sundaresan allows for a stochastic interest rate and correlation of the underlying asset's price with the interest rate. Using a data set of daily closing prices for Comex gold futures options, this paper tests the Ramaswamy and Sundaresan model against a constant interest rate model. Results indicate that the stochastic interest rate model is a superior predictor of market prices.

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