Abstract:
Recent empirical "ndings suggest that the long-run dependence in U.S. stock market
volatility is best described by a slowly mean-reverting fractionally integrated process. The
present study complements this existing time-series-based evidence by comparing the
risk-neutralized option pricing distributions from various ARCH-type formulations.
Utilizing a panel data set consisting of newly created exchange traded long-term equity
anticipation securities, or leaps, on the Standard and Poor's 500 stock market index with
maturity times ranging up to three years, we "nd that the degree of mean reversion in the
volatility process implicit in these prices is best described by a Fractionally Integrated
EGARCH (FIEGARCH) model.
