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Neglecting Parameter Changes In Garch Option Pricing Models And Var, Burak Hurmeydan

LSU Doctoral Dissertations

In GARCH models, neglecting parameter changes in the conditional volatility process results in biased estimation. The estimated sum of the autoregressive parameters of the conditional volatility converges to one. In Chapter 2, I analyze the effect of changes in the parameters of conditional volatility on European call option prices when these parameters are estimated ignoring the change-points. Simulation studies show that ignoring parameter changes in the conditional variance process of GARCH(1,1) models leads to biased estimates of option prices. The bias, measured in percentages, is most pronounced for out-of-the-money options, substantial for at-the-money options, and vanishes as options move deep-in-the-money. …