Option Pricing with State-dependent Pricing Kernel¶
Bibliographic record. Follow the original-source link for the publication.
| Field | Value |
|---|---|
| Primary domain | Volatility |
| Other domains | — |
| Methods | Research Methods |
| Facets | Instrument Index Options |
| Authors | Chen Tong, Peter Reinhard Hansen, Zhuo Huang |
| Published | 2022-04-14 |
| Source | arXiv Quantitative Finance History |
| Identifiers | arxiv:2112.05308 |
| URL | Open original source |
Editorial synthesis¶
Why it matters¶
The study allows the variance risk premium to vary with a Markov state, bringing time-varying volatility-risk aversion directly into a realized-GARCH option-pricing framework. (abstract:S1, abstract:S2, abstract:S3)
Main author claims¶
- The authors combine Markov switching with Realized GARCH, construct a pricing kernel with a state-dependent variance risk premium, and derive an approximate analytical formula for European options. (
abstract:S1,abstract:S2) - The authors report: On S&P 500 index options from 1990 to 2019, the authors report time-varying aversion to volatility-specific risk and at least a 15% reduction in in-sample and out-of-sample pricing errors relative to competing models. (
abstract:S3,abstract:S4)
Data, method, or discussion scope¶
The evidence covers a European-option pricing formula and in-sample and out-of-sample pricing-error comparisons on S&P 500 index options from 1990 to 2019. (abstract:S1, abstract:S2, abstract:S3, abstract:S4)
Main limitations¶
The abstract provides one index-options market and an aggregate error improvement but does not identify the competing models, loss function, transaction costs, or uncertainty in regime estimation. (abstract:S3, abstract:S4)
Relationships¶
- None recorded.