Next Article in Journal
Comparison of Prediction Models Applied in Economic Recession and Expansion
Previous Article in Journal
Size of the Company as the Main Determinant of Talent Management in Slovakia
Previous Article in Special Issue
Carry Cost Rate Regimes and Futures Hedge Ratio Variation
Open AccessArticle

GARCH Option Pricing Models and the Variance Risk Premium

by Wenjun Zhang 1,* and Jin E. Zhang 2
1
Department of Mathematical Sciences, School of Engineering, Computer and Mathematical Sciences, Auckland University of Technology, Auckland 1142, New Zealand
2
Department of Accountancy and Finance, Otago Business School, University of Otago, Dunedin 9054, New Zealand
*
Author to whom correspondence should be addressed.
J. Risk Financial Manag. 2020, 13(3), 51; https://doi.org/10.3390/jrfm13030051
Received: 3 February 2020 / Revised: 3 March 2020 / Accepted: 4 March 2020 / Published: 9 March 2020
(This article belongs to the Special Issue Empirical Asset Pricing)
In this paper, we modify Duan’s (1995) local risk-neutral valuation relationship (mLRNVR) for the GARCH option-pricing models. In our mLRNVR, the conditional variances under two measures are designed to be different and the variance process is more persistent in the risk-neutral measure than in the physical one, so that one is able to capture the variance risk premium. Empirical estimation exercises show that the GARCH option-pricing models under our mLRNVR are able to price the SPX one-month variance swap rate, i.e., the CBOE Volatility Index (VIX) accurately. Our research suggests that one should use our mLRNVR when pricing options with GARCH models. View Full-Text
Keywords: GARCH option-pricing models; stochastic volatility; the CBOE VIX; variance risk premium GARCH option-pricing models; stochastic volatility; the CBOE VIX; variance risk premium
Show Figures

Figure 1

MDPI and ACS Style

Zhang, W.; Zhang, J.E. GARCH Option Pricing Models and the Variance Risk Premium. J. Risk Financial Manag. 2020, 13, 51.

Show more citation formats Show less citations formats
Note that from the first issue of 2016, MDPI journals use article numbers instead of page numbers. See further details here.

Article Access Map by Country/Region

1
Back to TopTop