Option Pricing Using EGARCH Models - Proceedings AFIR 1996 - Nürnberg, Germany

Various e m p i r i d studies have shown that the time-varying volatility of asset returns can be described by GARCH (generalized autoregressive conditional heteroskedasticity) models. The corresponding GARCH option pricing model of Duan (1995) is capable of depicting the "smile-effect" which often can be found in option prices. In some derivative markets, however, the slope of the smile is not symmetrical. In this paper an option pricing model in the context of the EGARCH (Exponential GARCH) process will be developed. Extensive numerical analyses suggest that the EGARCH option pricing model is able to explain the different slopes of the smile curve. R C U d Plusieurs etudes empiriques suggbrent d'apprthender la volatilit6 temporelle de variables financibres h l'aide de modbles GARCH (generalized autoregressive conditional heteroskedasticity). Duan (1995) rtussit h l'aide d'un modble GARCH h d&rire les "smile-effect'' souvent observts lors d e la fixation des prix d'option. N h m o i n s sur certains marchts dtrivatifs, la pente de l'effet "smile" n'est pas symttrique. L'objet de cet article est de modtliser les prix d'option h partir d'un modble EGARCH (Exponential GARCH). Les analyses numtriques pdsentees h partir de ce modble montrent que ces dtveloppements sont h m&me d'expliquer difftrentes pentes pour l'effet "smile".