Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/259839 
Authors: 
Year of Publication: 
2000
Series/Report no.: 
Working Paper No. 2000:16
Publisher: 
Lund University, School of Economics and Management, Department of Economics, Lund
Abstract: 
This paper investigates the pricing bias in the Swedish OMX-Index Option market and how a stochastic volatility affects European call option prices. The market is purely European and without dividends for the period studied. A CIR square-root process for the volatility is estimated with non-linear least square minimization, and stochastic volatility option prices are calculated through Fourier-Inversion. These call option prices are compared to Black-Scholes prices as well as observed market prices, and a well-defined bias structure between Stochastic Volatility prices and Black-Scholes prices is observed. With a dynamic hedging scheme, I demonstrate larger (ex ante) profits, excluding transaction costs, for traders using the stochastic volatility model rather than the Black-Scholes model
Subjects: 
derivatives pricing
stochastic volatility
Fourier inversion
JEL: 
C52
G13
Document Type: 
Working Paper

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