An analytical approximation of option prices via TGARCH model
Journal article
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Strategic Research Themes
Publication Details
Author list: Hongwiengjan, Warunya; Thongtha, Dawud
Publication year: 2021
Volume number: 34
Issue number: 1
Start page: 948
End page: 969
Number of pages: 22
ISSN: 1331677X
Languages: English-Great Britain (EN-GB)
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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 (Formula presented.) the proposed method performed better than the others. The behaviour of the proposed method is also discussed. © 2020 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group.
Keywords
Edgeworth expansion, option pricing, threshold GARCH (TGARCH) model
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