Estimation of a Stochastic Volatility Model Using Pricing and Hedging Information

23 Pages Posted: 25 Jan 2005

See all articles by Jason Fink

Jason Fink

James Madison University - College of Business

Date Written: September 2002

Abstract

Estimation of option pricing models in which the underlying asset exhibits stochastic volatility presents complicated econometric questions. One such question, thus far unstudied, is whether the inclusion of information derived from hedging relationships implied by an option pricing model may be used in conjunction with pricing information to provide more reliable parameter estimates than the use of pricing information alone. This paper estimates, using a simple least-squares procedure, the stochastic volatility model of Heston (1993), and includes hedging information in the objective function. This hedging information enters the objective function through a weighting parameter that is chosen optimally within the model. With the weight appropriately chosen, we find that incorporating the hedging information reduces both the out-of-sample hedging and pricing errors associated with the Heston model.

Keywords: Stochastic Volatility, Options, Hedging

JEL Classification: C13, G13

Suggested Citation

Fink, Jason, Estimation of a Stochastic Volatility Model Using Pricing and Hedging Information (September 2002). Available at SSRN: https://ssrn.com/abstract=653984 or http://dx.doi.org/10.2139/ssrn.653984

Jason Fink (Contact Author)

James Madison University - College of Business ( email )

Harrisonburg, VA 22807
United States
540-568-8107 (Phone)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
238
Abstract Views
1,324
Rank
233,480
PlumX Metrics