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The Pricing Kernel in the Heston and Nandi (2000) and Heston (1993) Index Option Pricing Model: An Empirical Puzzle

Title:

The Pricing Kernel in the Heston and Nandi (2000) and Heston (1993) Index Option Pricing Model: An Empirical Puzzle

Sun, Qi (2014) The Pricing Kernel in the Heston and Nandi (2000) and Heston (1993) Index Option Pricing Model: An Empirical Puzzle. Masters thesis, Concordia University.

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Abstract

This thesis estimates a quadratic pricing kernel developed by Christoffersen, Heston and Jacobs (2013) under the Heston-Nandi GARCH pricing model, using both American and Canadian data. Initially, we find a misfit of data across different data samples, indicating lack of support in the closed-form quadratic pricing kernel. Comparing with the estimation of the continuous-time Heston (1993) model from Christoffersen, Jacobs, and Mimouni (2010), this empirical puzzle exists in both the Heston-Nandi (2000) GARCH and Heston (1993) stochastic volatility model.

We provide additional tests by comparing the Heston-Nandi and CHJ model with the overreaction tests. We find that their empirical performances are not differentiated. Also, we introduce the stochastic dominance bounds in order to select the mispriced options. The results from filtered data sample indicate the mispricing of options is significantly affecting the estimation.

Divisions:Concordia University > John Molson School of Business > Finance
Item Type:Thesis (Masters)
Authors:Sun, Qi
Institution:Concordia University
Degree Name:M. Sc.
Program:Administration (Finance option)
Date:October 2014
Thesis Supervisor(s):Perrakis, Stylianos
ID Code:979186
Deposited By: QI SUN
Deposited On:13 Jul 2015 18:32
Last Modified:18 Jan 2018 17:48
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