Option Pricing with Extreme Events: Using Câmara and Heston(2008)'s Model

For the KOSPI 200 Index options, we examine the effect of extreme events for pricing options. We compare Black and Scholes (1973) model with Câmara and Heston (2008)'s options pricing model that allows for both big downward and upward jumps. It is found that Câmara and Heston (2008)'s extr...

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Bibliographic Details
Published in:Asia-Pacific Journal of Financial Studies 2009, 38(2), , pp.187-209
Main Author: Kim, Sol
Format: Article
Language:English
Subjects:
Extreme Events
Jumps
Option Pricing
Risk-Neutral Distribution
Volatility Smiles
경영학
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Summary:For the KOSPI 200 Index options, we examine the effect of extreme events for pricing options. We compare Black and Scholes (1973) model with Câmara and Heston (2008)'s options pricing model that allows for both big downward and upward jumps. It is found that Câmara and Heston (2008)'s extreme events option pricing model shows better performance than Black and Scholes (1973) model does for both in‐sample and out‐of‐sample pricing. Also downward jumps are a more important factor for pricing stock index options than upward jumps. It is consistent with the empirical evidence that reports the sneers or negative skews in the stock index options market.
ISSN:1226-1165
2041-9945
2041-6156
DOI:10.1111/j.2041-6156.2009.tb00012.x