Which Volatility Model Should be Used for Option Pricing

摘要: Characterizing asset return dynamics using GARCH models is an important part of empirical finance. The existing literature favors some rather complex volatility specifications whose relative performance usually assessed through their likelihood based on a time-series returns. This paper compares range along different dimension, option prices and returns, under the risk-neutral as well objective probability measure. We judge various by evaluating function prices. In contrast with likelihood-based inference, we find that our option-based relatively parsimonious model. Specifically, when evaluated out-of-sample, analysis model besides clustering only allows for standard leverage effect. growing suggesting discrete-time pricing time-varying practical insightful. Our results may also have implications continuous-time stochastic models.