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A GARCH option pricing model with filtered historical simulation

Barone-Adesi, Giovanni ; Engle, Robert F. ; Mancini, Loriano

In: The review of financial studies, 2008, vol. 21, no. 3, p. 1223-1258

We propose a new method for pricing options based on GARCH models with filtered historical innovaions. In an incomplete market framework, we allow for different distributions of historical and pricing return dynamics, which enhances the model’s flexibility to fit market option prices. An extensive empirical analysis based on S&P 500 Index options shows that our model outperforms other...