A New Closed-Form Discrete-Time Option Pricing Model with Stochastic Volatility
Prof. Kris JACOBS
C.T. Bauer Chair in Finance
University of Houston
Date: 12 March 2024 (Tuesday)
Time: 10:30 am to 12:00 pm
Venue: E22-G015
Host: Prof. Wenjin KANG, Professor in Finance
Abstract
In the option pricing literature, closed-form pricing formulas offer many advantages, but very few solutions are available. Among models that can incorporate the critically important stylized fact of stochastic volatility, the only known reliable solution for European options is the square root model in Heston (1993). Heston and Nandi (2000) offer a discrete-time alternative, but this is a GARCH-type model which does not feature stochastic volatility. We propose a new closed-form discrete-time option pricing model with stochastic volatility. The model is straightforward
to implement. We estimate it using (jointly) a long historical time series of index returns and large option panels with various moneyness and maturities. The model vastly outperforms the existing discrete-time Heston-Nandi benchmark and slightly improves on the continuous-time benchmark. The model-implied pricing kernel and risk premiums are very plausible. The newly proposed pricing formula can be used to implement various extensions of the model.
Speaker
Prof. Kris JACOBS holds the C.T. Bauer Chair in Finance at the Bauer College of Business, University of Houston. He received his Ph.D. from the University of Pittsburgh and his undergraduate and Master’s degrees from the University of Leuven in Belgium. His research interests include asset valuation, derivatives and fixed income markets, credit risk, risk management, financial econometrics, and commodity markets. His research is very widely published and cited in all leading journals in finance such as the Journal of Finance, Review of Financial Studies, Journal of Financial Economics, Journal of Financial and Quantitative Analysis, and Management Science. He is also the associate editor for several journals such as the Journal of Banking and Finance, Journal of Empirical Finance, Financial Management, and Journal of Applied Econometrics.
All are welcome!
