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

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 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Asia-Pacific Journal of Financial Studies Wiley

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

Kim, Sol
Asia-Pacific Journal of Financial Studies , Volume 38 (2) – Jan 1, 2009
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Publisher
Wiley
Copyright
Copyright © 2009 Wiley Subscription Services
ISSN
1226-1165
eISSN
2041-6156
DOI
10.1111/j.2041-6156.2009.tb00012.x
Publisher site
See Article on Publisher Site

Abstract

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.

Journal

Asia-Pacific Journal of Financial Studies – Wiley

Published: Jan 1, 2009

Keywords: ; ; ; ;

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