The performance of alternative valuation models in the OTC currency options market
Abstract
We compare option valuation models based on regime-switching, GARCH, and jump-diffusion
processes to a standard "smile" model, in which Black and Scholes (1973) implied volatilities
are allowed to vary across strike prices. The regime-switching, GARCH, and jump-diffusion
models provide significant improvement over a fixed smile model in fitting GBP and
JPY option prices both in-sample and out-of-sample. The jump-diffusion model achieves
the tightest fit. A time-varying smile model, however, provides hedging performance
that is comparable to the other models for the GBP options. This result suggests that
standard option valuation techniques may provide a reasonable basis for trading and
hedging strategies. © 2003 Elsevier Science Ltd. All rights reserved.
Type
Journal articlePermalink
https://hdl.handle.net/10161/1967Published Version (Please cite this version)
10.1016/S0261-5606(02)00073-6Publication Info
Bollen, NPB; & Rasiel, E (2003). The performance of alternative valuation models in the OTC currency options market.
Journal of International Money and Finance, 22(1). pp. 33-64. 10.1016/S0261-5606(02)00073-6. Retrieved from https://hdl.handle.net/10161/1967.This is constructed from limited available data and may be imprecise. To cite this
article, please review & use the official citation provided by the journal.
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Show full item recordScholars@Duke
Emma Rasiel
Richard Y. Li Professor of the Practice
Emma Rasiel is the Teaching Director of the Duke Financial Economics Center, as well
as Associate Chair and Professor of Economics at Duke. Emma’s role includes developing
and delivering curricular and extra-curricular programs to Duke undergraduates to
improve their preparedness for careers in business and finance. Emma’s regularly taught
courses include Practical Financial Markets, Intermediate Finance, and Equity Research.
She also enjoys

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