Do return and volatility series share the same drive in closed-form GARCH option pricing model?
Date Issued
2005
Date
2005
Author(s)
Chang, Kai-lin
DOI
en-US
Abstract
This paper examines the dynamic relations between return and volatility series under the assumption of closed form GARCH model. A multiple hypotheses testing method is employed to identify causal relations between the two series and to test the empirical implication of the assumption of Heston and Nandi (2000) on GARCH option pricing model. The international empirical results show that returns and volatility series do not perfectly correlated instantaneously, that is contemporaneous relation. There exists unidirectional, return lead volatility, or feedback relation; two series are cross-correlated by past information. Different GARCH models also have the same result. It is found that return leads volatility. This result help explain why HN model has inferior performance in some option application, such as hedging.
Subjects
GARCH
報酬與變異數
因果關係
GARCH選擇權模型
GARCH option pricing
Causality
return and volatility
Type
thesis