Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/239129 
Year of Publication: 
2020
Citation: 
[Journal:] Journal of Risk and Financial Management [ISSN:] 1911-8074 [Volume:] 13 [Issue:] 3 [Publisher:] MDPI [Place:] Basel [Year:] 2020 [Pages:] 1-21
Publisher: 
MDPI, Basel
Abstract: 
In this paper, we modify Duan's (1995) local risk-neutral valuation relationship (mLRNVR) for the GARCH option-pricing models. In our mLRNVR, the conditional variances under two measures are designed to be different and the variance process is more persistent in the risk-neutral measure than in the physical one, so that one is able to capture the variance risk premium. Empirical estimation exercises show that the GARCH option-pricing models under our mLRNVR are able to price the SPX one-month variance swap rate, i.e., the CBOE Volatility Index (VIX) accurately. Our research suggests that one should use our mLRNVR when pricing options with GARCH models.
Subjects: 
GARCH option-pricing models
stochastic volatility
the CBOE VIX
variance risk premium
JEL: 
G13
C52
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

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