Option Valuation with Nonmonotonic Pricing Kernel and Embedded Volatility Component Premiums

淡江大學機構典藏 > 商管學院 > 財務金融學系暨研究所 > 期刊論文 > Item 987654321/122907

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Title:	Option Valuation with Nonmonotonic Pricing Kernel and Embedded Volatility Component Premiums
Authors:	Hsuan-Ling Chang, Hung-Wen Cheng, Yi-Ding Lei, Jeffrey Tzuhao Tsai
Date:	2023-08
Issue Date:	2023-04-28 16:25:55 (UTC+8)
Abstract:	This article develops a nonmonotonic pricing kernel with long-run and short-run variance risk premiums for option valuation, with a proposed pricing kernel retaining a U-shaped pattern that significantly improves the fitting ability for index options pricing and implied volatility. The estimation results show that the long-run volatility component is critical in generating the negative risk premium. In the in-sample and out-of-sample tests, the model with the new pricing kernel has more accurate predictions, especially the year around the financial crisis, wherein there is a decrease of an average of 35% root mean square error relative to the benchmark. Considering the bull and bear market states, our model improves implied volatility root mean square error by 23% on average.
Relation:	The Journal of Derivatives 31(4) Summer 2024
DOI:	10.3905/jod.2023.1.184
Appears in Collections:	[財務金融學系暨研究所] 期刊論文

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