Title: Pricing SPX and DIX by HAR models

Authors: Yow-Jen Jou, Chih-Wei Wang, Wan-Chien Chiu

Addresses: Graduate Institute of Finance, National Chiao Tung University, 1001 University Road, Hsinchu, Taiwan, ROC. ' Graduate Institute of Finance, National Chiao Tung University, 1001 University Road, Hsinchu, Taiwan, ROC. ' Graduate Institute of Finance, National Chiao Tung University, 1001 University Road, Hsinchu, Taiwan, ROC

Abstract: Previous studies have documented that, with use of high-frequency data, the Heteroskedasticity AR (HAR-RV) model performs better than other models in fitting financial return volatility measurement and has a more accurate forecasting ability. However, to our knowledge, no previous studies have investigated whether HAR-RV model can improve option pricing performance in financial markets. This study compares HAR-RV model and EGARCH model in terms of option pricing performance. As expected, the results of this study demonstrate that HAR-RV model is more accurate than EGARCH model in terms of S&P500 Index options (SPX) and Dow Jones Index options (DIX).

Keywords: high-frequency data; HAR-RV model; EGARCH model; option pricing performance; SPX; DIX; moneyness effects; Heteroskedasticity AR; financial returns; volatility measurement; forecasting.

DOI: 10.1504/IJCSE.2010.030226

International Journal of Computational Science and Engineering, 2010 Vol.5 No.1, pp.10 - 20

Published online: 11 Dec 2009 *

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