Volatility Timing: Pricing Barrier Options on DAX XETRA Index
This paper analyses the impact of different volatility structures on a range of traditional option pricing models for the valuation of call down and out style barrier options. The construction of a Risk-Neutral Probability Term Structure (RNPTS) is one of the main contributions of this research, whi...
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| Format: | Article |
| Language: | English |
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MDPI AG
2020-05-01
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| Series: | Mathematics |
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| Online Access: | https://www.mdpi.com/2227-7390/8/5/722 |
| _version_ | 1797568805630640128 |
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| author | Carlos Esparcia Elena Ibañez Francisco Jareño |
| author_facet | Carlos Esparcia Elena Ibañez Francisco Jareño |
| author_sort | Carlos Esparcia |
| collection | DOAJ |
| description | This paper analyses the impact of different volatility structures on a range of traditional option pricing models for the valuation of call down and out style barrier options. The construction of a Risk-Neutral Probability Term Structure (RNPTS) is one of the main contributions of this research, which changes in parallel with regard to the Volatility Term Structure (VTS) in the main and traditional methods of option pricing. As a complementary study, we propose the valuation of options by assuming a constant or historical volatility. The study implements the GARCH (1,1) model with regard to the continuously compound returns of the DAX XETRA Index traded at daily frequency. Current methodology allows for obtaining accuracy forecasts of the realized market barrier option premiums. The paper highlights not only the importance of selecting the right model for option pricing, but also fitting the most accurate volatility structure. |
| first_indexed | 2024-03-10T20:02:19Z |
| format | Article |
| id | doaj.art-522252c0a3ed47ae8610df002427a32b |
| institution | Directory Open Access Journal |
| issn | 2227-7390 |
| language | English |
| last_indexed | 2024-03-10T20:02:19Z |
| publishDate | 2020-05-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | Mathematics |
| spelling | doaj.art-522252c0a3ed47ae8610df002427a32b2023-11-19T23:28:50ZengMDPI AGMathematics2227-73902020-05-018572210.3390/math8050722Volatility Timing: Pricing Barrier Options on DAX XETRA IndexCarlos Esparcia0Elena Ibañez1Francisco Jareño2School of Business and Communication, International University of La Rioja, 26006 Logroño, SpainSchool of Economics and Business, University of Castilla-La Mancha, 02071 Albacete, SpainDepartment of Economics and Finance, University of Castilla-La Mancha, 02071 Albacete, SpainThis paper analyses the impact of different volatility structures on a range of traditional option pricing models for the valuation of call down and out style barrier options. The construction of a Risk-Neutral Probability Term Structure (RNPTS) is one of the main contributions of this research, which changes in parallel with regard to the Volatility Term Structure (VTS) in the main and traditional methods of option pricing. As a complementary study, we propose the valuation of options by assuming a constant or historical volatility. The study implements the GARCH (1,1) model with regard to the continuously compound returns of the DAX XETRA Index traded at daily frequency. Current methodology allows for obtaining accuracy forecasts of the realized market barrier option premiums. The paper highlights not only the importance of selecting the right model for option pricing, but also fitting the most accurate volatility structure.https://www.mdpi.com/2227-7390/8/5/722barrier optionsknock-outGARCH models |
| spellingShingle | Carlos Esparcia Elena Ibañez Francisco Jareño Volatility Timing: Pricing Barrier Options on DAX XETRA Index Mathematics barrier options knock-out GARCH models |
| title | Volatility Timing: Pricing Barrier Options on DAX XETRA Index |
| title_full | Volatility Timing: Pricing Barrier Options on DAX XETRA Index |
| title_fullStr | Volatility Timing: Pricing Barrier Options on DAX XETRA Index |
| title_full_unstemmed | Volatility Timing: Pricing Barrier Options on DAX XETRA Index |
| title_short | Volatility Timing: Pricing Barrier Options on DAX XETRA Index |
| title_sort | volatility timing pricing barrier options on dax xetra index |
| topic | barrier options knock-out GARCH models |
| url | https://www.mdpi.com/2227-7390/8/5/722 |
| work_keys_str_mv | AT carlosesparcia volatilitytimingpricingbarrieroptionsondaxxetraindex AT elenaibanez volatilitytimingpricingbarrieroptionsondaxxetraindex AT franciscojareno volatilitytimingpricingbarrieroptionsondaxxetraindex |