Option Pricing Applications of Quadratic Volatility Models


Recently there has been a surge of interest in higher order moment properties of time varying volatility models. Various GARCH-type models have been developed and successfully applied in empirical finance. Moment properties are important because the existence of moments permit verification of how well theoretical models match stylized facts such as fat tails in most financial data. In this paper, we consider various types of random coefficient autoregressive (RCA) models with quadratic generalized autoregressive conditional heteroscedasticity (GARCH) errors and study the mo-ments, mean, variance and kurtosis. We also consider the Black-Scholes model with RCA GARCH volatility and show that these moments can be used to evaluate the call price for European options.

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S. Appadoo, A. Thavaneswaran and S. Muthukumarana, "Option Pricing Applications of Quadratic Volatility Models," Journal of Mathematical Finance, Vol. 2 No. 2, 2012, pp. 159-174. doi: 10.4236/jmf.2012.22017.

Conflicts of Interest

The authors declare no conflicts of interest.


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