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Realizing smiles: Options pricing with realized volatility

Corsi, Fulvio
Fusari, Nicola
Published in Journal of Financial Economics. 2013, vol. 107, no. 2, p. 284-304
Abstract We develop a discrete-time stochastic volatility option pricing model exploiting the information contained in the Realized Volatility (RV), which is used as a proxy of the unobservable log-return volatility. We model the RV dynamics by a simple and effective long-memory process, whose parameters can be easily estimated using historical data. Assuming an exponentially affine stochastic discount factor, we obtain a fully analytic change of measure. An empirical analysis of Standard and Poor's 500 index options illustrates that our model outperforms competing time-varying and stochastic volatility option pricing models.
Keywords High-frequencyRealized volatilityOption pricing
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CORSI, Fulvio, FUSARI, Nicola, LA VECCHIA, Davide. Realizing smiles: Options pricing with realized volatility. In: Journal of Financial Economics, 2013, vol. 107, n° 2, p. 284-304. doi: 10.1016/j.jfineco.2012.08.015 https://archive-ouverte.unige.ch/unige:75147

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Deposited on : 2015-09-13

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