Theoretical Economics Letters

Volume 6, Issue 2 (April 2016)

ISSN Print: 2162-2078   ISSN Online: 2162-2086

Google-based Impact Factor: 1.19  Citations  h5-index & Ranking

Performance of the Heston’s Stochastic Volatility Model: A Study in Indian Index Options Market

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DOI: 10.4236/tel.2016.62018    2,380 Downloads   4,393 Views  Citations
Author(s)

ABSTRACT

This study attempts to analyse one-day-ahead out-of-sample performance of the stochastic volatility model of Heston (SVH) in the Indian context. Also, the study compares the ex-ante performance of the SVH with that of a Two-Scale-Realised-Volatility (TSRV)-based Black-Scholes model (BS) using the liquidity-weighted performance metrics. For the purpose, we utilise the tick-by-tick data of the CNX Nifty index and options thereon, the most liquid equity options in the world in terms of the number of contracts traded1. Additionally, the study compares the two models across subgroups based on the moneyness, volatility of the underlying and time-to-expiration of the options. The results establish that the SVH model is better than the BS model in pricing equity index options. Further, the SVH model appears to be superior across all the subgroups, for both call options and put options.

Share and Cite:

Singh, S. and Dixit, A. (2016) Performance of the Heston’s Stochastic Volatility Model: A Study in Indian Index Options Market. Theoretical Economics Letters, 6, 151-165. doi: 10.4236/tel.2016.62018.

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