Monash University

Implicit Bayesian Inferece Using Option Prices

Email address: Gael.Martin@BusEco.monash.edu.au

Keywords: Bayesian Implicit Inference; Non normality; Option Price Prediction ; Hedging Errors; Model Averaging

JEL Classifications: C11, G13

Abstract:
A Bayesian approach to option pricing is presented, in which posterior inference about the underlying returns process is conducted implicitly via observed option prices. A range of models allowing for leptokurtosis and skewness in returns are considered, with posterior parameter distributions and model probabilities backed out from the option prices. Models are ranked according to several criteria, including out-of-sample fit, predictive and edging performance. In addition, model averaged performance is assessed. The method is applied to option price data on the S&P500 stock index. Whilst the results provide support for models which accommodate leptokurtosis, no one model dominates according to all criteria considered.

PDF file of paper: Not available.

Session: Bayesian Econometrics

Time: Friday, 6 July, 3:30pm - 5pm

Room: C