Realizing smiles: Options pricing with realized volatility

Fulvio Corsi, Nicola Fusari, Davide La Vecchia

Research output: Contribution to journalArticleResearchpeer-review

46 Citations (Scopus)

Abstract

We develop a discrete-time stochastic volatility option pricing model exploiting the information contained in the Realized Volatility (RV), which is used as a proxy of the unobservable log-return volatility. We model the RV dynamics by a simple and effective long-memory process, whose parameters can be easily estimated using historical data. Assuming an exponentially affine stochastic discount factor, we obtain a fully analytic change of measure. An empirical analysis of Standard and Poor s 500 index options illustrates that our model outperforms competing time-varying and stochastic volatility option pricing models.
Original languageEnglish
Pages (from-to)284 - 304
Number of pages21
JournalJournal of Financial Economics
Volume107
Issue number2
DOIs
Publication statusPublished - 2013

Cite this