Evaluation of Black-Scholes and GARCH Models Using Currency Call Options Data

This paper empirically examines the performance of Black-Scholes and Garch-M call option pricing models using call options data for British Pounds, Swiss Francs and Japanese Yen. The daily exchange rates exhibit an overwhelming presence of volatility clustering, suggesting that a richer model with A...

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Bibliographic Details
Published in:Review of quantitative finance and accounting 2004-12, Vol.23 (4), p.299-312
Main Authors: Harikumar, T, de Boyrie, Maria E, Pak, Simon J
Format: Article
Language:English
Subjects:
Accounting
American dollar
College professors
Currencies
Currency
Currency options
Econometrics
Economic models
Exchange rates
Federal Reserve monetary policy
Finance
Financial economics
Foreign exchange markets
Foreign exchange rates
Interest rates
Lagrange multiplier
Manycountries
Option pricing
Options markets
Put & call options
Securities prices
Standard deviation
Statistical significance
Stochastic models
Stock exchanges
Studies
Volatility
Yen
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Summary:This paper empirically examines the performance of Black-Scholes and Garch-M call option pricing models using call options data for British Pounds, Swiss Francs and Japanese Yen. The daily exchange rates exhibit an overwhelming presence of volatility clustering, suggesting that a richer model with ARCH/GARCH effects might have a better fit with actual prices. We perform dominant tests and calculate average percent mean squared errors of model prices. Our findings indicate that the Black-Scholes model outperforms the GARCH models. An implication of this result is that participants in the currency call options market do not seem to price volatility clusters in the underlying process. [PUBLICATION ABSSTACT]
ISSN:0924-865X
1573-7179
DOI:10.1023/B:REQU.0000049318.78363.3c