Original scientific paper
https://doi.org/10.1080/1331677X.2020.1805636
An analytical approximation of option prices via TGARCH model
Warunya Hongwiengjan
Dawud Thongtha
Abstract
An option is a financial contract that can be used to reduce risks
in an investment. It is widely known that a fair price of this contract depends significantly on the volatility of an underlying asset
price, which may be affected differently by positive and negative
information. Therefore, the fair price of option has been studied
through various methods. In this research, an analytical formula
for European option pricing via the TGARCH model is derived
based on an Edgeworth expansion of the density of cumulative
asset return. Furthermore, the accuracy of the proposed method
is investigated by comparing numerical results with the GARCH
model, TGARCH model, analytical approximation via the GARCH
model and Monte Carlo technique. The results reveal that in the
case of in the money (ITM) with K=St 0:95, the proposed
method performed better than the others. The behaviour of the
proposed method is also discussed.
Keywords
Edgeworth expansion; option pricing; threshold GARCH (TGARCH) model
Hrčak ID:
301197
URI
Publication date:
31.12.2021.
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