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The Impact of Liquidity on GARCH Option Pricing Error during Financial Crisis
Applied Economics and Finance
View Archive Info| Field | Value | |
| Title |
The Impact of Liquidity on GARCH Option Pricing Error during Financial Crisis
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| Creator |
Huang, Han Ching
Su, Yong Chern Chen, Wei-Shen |
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| Description |
In this paper, we explore the valuation performance of Heston and Nandi GARCH (HN GARCH) model on the pricing of options of financial stocks listed for AMEX during pre and post financial crisis periods. We find that the GARCH pricing model presents better performance than the traditional Black-Scholes model for the out-of-sample option pricing, no matter what the moneyness and the time-to-maturity. Specifically, the models show the effects of liquidity is not significant. Intuitionally, smaller liquidity tends to exhibit more pricing errors, especially for longer mature options. Unfortunately, we cannot get the expected outcomes, which is that the period of post financial crisis tend to have larger pricing errors. In sum, except more computational convenience, the HN GARCH model offers another vision of the relationship between liquidity and its effect on pricing errors.
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| Publisher |
Redfame Publishing
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| Contributor |
—
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| Date |
2017-06-25
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| Type |
info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion Peer-reviewed Article |
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| Format |
application/pdf
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| Identifier |
http://redfame.com/journal/index.php/aef/article/view/2513
10.11114/aef.v4i4.2513 |
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| Source |
Applied Economics and Finance; Vol 4, No 4 (2017); 160-168
2332-7308 2332-7294 |
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| Language |
eng
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| Relation |
http://redfame.com/journal/index.php/aef/article/view/2513/2646
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| Rights |
Copyright (c) 2017 Applied Economics and Finance
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