GARCH Option Pricing with Implied Volatility

Posted: 22 Aug 1998

See all articles by B. Wade Brorsen

B. Wade Brorsen

Oklahoma State University - Stillwater - Department of Agricultural Economics

N'Zue F. Fofana

affiliation not provided to SSRN

Abstract

Generalized autoregressive conditional heteroskedasticity (GARCH) option pricing models (OPM) with historical volatility have proven superior to the log-normality assumption of the Black option pricing model with historical volatility. This paper estimates implied volatilities from GARCH OPM. The estimated implied volatilities are used to forecast option premia. The GARCH implied volatilities are more stable than the Black implied volatilities. The GARCH OPM with implied volatility should provide better guidance to market makers and arbitragers than the Black option pricing model with implied volatility for options ranging from six to sixteen days to maturity. For options ranging from 21 to 50 days to maturity the Black OPM with implied volatility should provide better guidance to market makers and arbitragers than the GARCH OPM with implied volatility.

JEL Classification: G13

Suggested Citation

Brorsen, B. Wade and Fofana, N'Zue F., GARCH Option Pricing with Implied Volatility. Available at SSRN: https://ssrn.com/abstract=6881

B. Wade Brorsen (Contact Author)

Oklahoma State University - Stillwater - Department of Agricultural Economics ( email )

Stillwater, OK 74078-6026
United States
405-744-6836 (Phone)
405-744-8210 (Fax)

N'Zue F. Fofana

affiliation not provided to SSRN

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