Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/61730
Authors: 
Hafner, Christian M.
Herwartz, Helmut
Year of Publication: 
1999
Series/Report no.: 
Discussion Papers, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes 1999,58
Abstract: 
Daily returns of financial assets are frequently found to exhibit positive autocorrelation at lag 1. When specifying a linear AR(l) conditional mean, one may ask how this predictability affects option prices. We investigate the dependence of option prices on autoregressive dynamics under stylized facts of stock returns, i.e., conditional heteroskedasticity: leverage effect, and conditional leptokurtosis. Our analysis covers both a continuous and discrete time framework. The results suggest that a non-zero autoregression coefficient tends to increase the deviation of option prices from Black & Scholes prices caused by stochastic volatility.
Subjects: 
option pricing
autoregression
heteroskedasticity
GARCH
leverage effect
conditional leptokurtosis
JEL: 
C15
C22
G13
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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