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| Author: | Bauwens, L. Lubrano, M. |
| Title: | Bayesian option pricing using asymmetric GARCH models |
| Journal: | Journal of Empirical Finance
2002 : AUG, VOL. 9:3, p. 321-342 |
| Index terms: | OPTIONS OPTION PRICES SIMULATION MODEL TESTING MODELS |
| Language: | eng |
| Abstract: | This paper shows how one can compute option prices from a Bayesian inference viewpoint, using a GARCH model for the dynamics of the volatility of the underlying asset. The proposed evaluation of an option is the predictive expectation of its payoff function. The predictive distribution of this function provides a natural metric, provided it is neutralized with respect to risk, for gauging the predictive option price or other option evaluations. The proposed method is compared to the Black and Scholes evaluation, in which a marginal mean volatility is plugged, but which does not provide a natural metric. The methods are illustrated using symmetric, asymmetric and smooth transition GARCH models with data on a stock index in Brussels. |
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