An analytical approximation of option prices via TGARCH model
An option is a financial contract that can be used to reduce risks in an investment. It is widely known that a fair price of this contract depends significantly on the volatility of an underlying asset price, which may be affected differently by positive and negative information. Therefore, the fair...
Main Authors: | , |
---|---|
Format: | Article |
Language: | English |
Published: |
Taylor & Francis Group
2021-01-01
|
Series: | Ekonomska Istraživanja |
Subjects: | |
Online Access: | http://dx.doi.org/10.1080/1331677X.2020.1805636 |
id |
doaj-6d54af9ac79044f594fde1b249313211 |
---|---|
record_format |
Article |
spelling |
doaj-6d54af9ac79044f594fde1b2493132112021-06-02T08:05:30ZengTaylor & Francis GroupEkonomska Istraživanja1331-677X1848-96642021-01-0134194896910.1080/1331677X.2020.18056361805636An analytical approximation of option prices via TGARCH modelWarunya Hongwiengjan0Dawud Thongtha1Department of Mathematics, Faculty of Science, King Mongkut’s University of Technology Thonburi (KMUTT)Department of Mathematics, Faculty of Science, King Mongkut’s University of Technology Thonburi (KMUTT)An option is a financial contract that can be used to reduce risks in an investment. It is widely known that a fair price of this contract depends significantly on the volatility of an underlying asset price, which may be affected differently by positive and negative information. Therefore, the fair price of option has been studied through various methods. In this research, an analytical formula for European option pricing via the TGARCH model is derived based on an Edgeworth expansion of the density of cumulative asset return. Furthermore, the accuracy of the proposed method is investigated by comparing numerical results with the GARCH model, TGARCH model, analytical approximation via the GARCH model and Monte Carlo technique. The results reveal that in the case of in the money (ITM) with the proposed method performed better than the others. The behaviour of the proposed method is also discussed.http://dx.doi.org/10.1080/1331677X.2020.1805636edgeworth expansionoption pricingthreshold garch (tgarch) model |
collection |
DOAJ |
language |
English |
format |
Article |
sources |
DOAJ |
author |
Warunya Hongwiengjan Dawud Thongtha |
spellingShingle |
Warunya Hongwiengjan Dawud Thongtha An analytical approximation of option prices via TGARCH model Ekonomska Istraživanja edgeworth expansion option pricing threshold garch (tgarch) model |
author_facet |
Warunya Hongwiengjan Dawud Thongtha |
author_sort |
Warunya Hongwiengjan |
title |
An analytical approximation of option prices via TGARCH model |
title_short |
An analytical approximation of option prices via TGARCH model |
title_full |
An analytical approximation of option prices via TGARCH model |
title_fullStr |
An analytical approximation of option prices via TGARCH model |
title_full_unstemmed |
An analytical approximation of option prices via TGARCH model |
title_sort |
analytical approximation of option prices via tgarch model |
publisher |
Taylor & Francis Group |
series |
Ekonomska Istraživanja |
issn |
1331-677X 1848-9664 |
publishDate |
2021-01-01 |
description |
An option is a financial contract that can be used to reduce risks in an investment. It is widely known that a fair price of this contract depends significantly on the volatility of an underlying asset price, which may be affected differently by positive and negative information. Therefore, the fair price of option has been studied through various methods. In this research, an analytical formula for European option pricing via the TGARCH model is derived based on an Edgeworth expansion of the density of cumulative asset return. Furthermore, the accuracy of the proposed method is investigated by comparing numerical results with the GARCH model, TGARCH model, analytical approximation via the GARCH model and Monte Carlo technique. The results reveal that in the case of in the money (ITM) with the proposed method performed better than the others. The behaviour of the proposed method is also discussed. |
topic |
edgeworth expansion option pricing threshold garch (tgarch) model |
url |
http://dx.doi.org/10.1080/1331677X.2020.1805636 |
work_keys_str_mv |
AT warunyahongwiengjan ananalyticalapproximationofoptionpricesviatgarchmodel AT dawudthongtha ananalyticalapproximationofoptionpricesviatgarchmodel AT warunyahongwiengjan analyticalapproximationofoptionpricesviatgarchmodel AT dawudthongtha analyticalapproximationofoptionpricesviatgarchmodel |
_version_ |
1721406703627403264 |