AMERICAN OPTION PRICING UNDER GARCH DIFFUSION MODEL： AN EMPIRICAL STUDY

The GARCH diffusion model has received much attention in recent years, as it describes financial time series better when compared to many other models. In this paper, the authors study the empirical performance of American option pricing model when the underlying asset follows the GARCH diffusion. T...

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Bibliographic Details
Published in:Journal of systems science and complexity 2014-02, Vol.27 (1), p.193-207
Main Authors: Wu, Xinyu, Yang, Wenyu, Ma, Chaoqun, Zhao, Xiujuan
Format: Article
Language:English
Subjects:
Complex Systems
Control
GARCH模型
Mathematics
Mathematics and Statistics
Mathematics of Computing
Operations Research/Decision Theory
Statistics
Systems Theory
估计方法
扩散模型
最大似然
期权定价模型
美式期权
重要性采样
金融时间序列
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Summary:The GARCH diffusion model has received much attention in recent years, as it describes financial time series better when compared to many other models. In this paper, the authors study the empirical performance of American option pricing model when the underlying asset follows the GARCH diffusion. The parameters of the GARCH diffusion model are estimated by the efficient importance sampling-based maximum likelihood （EIS-ML） method. Then the least-squares Monte Carlo （LSMC） method is introduced to price American options. Empirical pricing results on American put options in Hong Kong stock market shows that the GARCH diffusion model outperforms the classical constant volatility （CV） model significantly.
ISSN:1009-6124
1559-7067
DOI:10.1007/s11424-014-3279-2