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Fulvio Corsi, Lugano U. Print
Thursday, 19 November 2009, 12:15 - 13:15

Realizing Smiles: Pricing Options with Realized Volatility

Abstract: We develop a stochastic volatility option pricing model that exploits the informative content of historical high frequency data. Using the Two Scales Realized Volatility as a proxy for the unobservable returns volatility, we propose a simple (affine) but effective long-memory process: the Heterogeneous Auto-Regressive Gamma (HARG) model. This discrete--time process, combined with an exponential affine stochastic discount factor, leads to a completely tractable risk-neutral dynamics. The explicit change of probability measure obtained within this framework allows the estimation of the risk-neutral parameters directly under the physical measure, leaving only one free parameters to be calibrated.

Fulvio Corsi, University of Lugano and Swiss Finance Institute

paper 1 - paper 2

Location: S 12.227
Contact: Claude Adan, This e-mail address is being protected from spam bots, you need JavaScript enabled to view it