The performance of alternative valuation models in the OTC currency options market
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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.
Published Version (Please cite this version)10.1016/S0261-5606(02)00073-6
Publication InfoBollen, 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.
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Professor of the Practice of Economics
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