Option pricing under linear autoregressive dynamics, heteroskedasticity, and conditional leptokurtosis
(2001) Journal of Empirical Finance — Vol. 8, n° 1, p. 1-34 (2001)
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- Authors
- Abstract
- Daily returns of financial assets are frequently found to exhibit positive autocorrelation at lag 1. When specifying a linear AR(1) conditional mean, one may ask how this predictability affects option prices. We investigate the dependence of option prices on autoregressive dynamics under stylized facts of stock returns, i.e. conditional heteroskedasticity, leverage effect, and conditional leptokurtosis. Our analysis covers both a continuous and discrete time framework. The results suggest that a non-zero autoregression coefficient tends to increase the deviation of option prices from Black and Scholes prices caused by stochastic volatility.
- Affiliations
Electrabel R&D Energy Markets Humboldt-Universität Institut für Statistik und Ökonometrie
Citations
Hafner, C., & Herwartz, H. (2001). Option pricing under linear autoregressive dynamics, heteroskedasticity, and conditional leptokurtosis. Journal of Empirical Finance, 8(1), 1-34. https://doi.org/10.1016/S0927-5398(00)00024-4 (Original work published 2001)