Martingalized Historical approach for Option Pricing

Journal article: In a discrete time option pricing framework, we compare the empirical performance of two pricing methodologies, namely the affine stochastic discount factor (SDF) and the empirical martingale correction methodologies. Using a CAC 40 options dataset, the differences are found to be small: the higher order moment correction involved in the SDF approach may not be that essential to reduce option pricing errors. This paper puts into evidence the fact that an appropriate modelling under the historical measure associated with an adequate correction (that we call here a ”martingale correction”) permits to provide option prices which are close to market ones.

Author(s)

Christophe Chorro, Dominique Guegan, Florian Ielpo

Journal
  • Finance Research Letters
Date of publication
  • 2010
Keywords JEL
C5 C8 G12 G17
Keywords
  • Generalized Hyperbolic Distribution
  • Option pricing
  • Incomplete market
  • CAC40
  • Stochastic Discount Factor
  • Martingale Correction
Pages
  • 24-28
Version
  • 1
Volume
  • 7