APPLICATION AND COMPARISON BETWEEN MERTON AND GARCH OPTION MODEL FOR BARRIER OPTION IN INDONESIA STOCK EXCHANGE
Abstract
The purpose of this research is to compare the accuracy of Merton Option Model
and GARCH option models for Barrrier Option utilizing data from Astra, BCA,
Indofood and Telkom at the Indonesian Stock Exchange.
The intraday stock return of Astra, BCA, Indofood and Telkom exhibits an
overwhelming presence of volatility clustering, suggesting that GARCH model
has an effect which best corresponds with the actual price. The best model is
constructed using ARIMA model and the best lag in GARCH model is extracted.
The finding from this research show that by comparing the average percentage
mean squared errors of the GARCH Option Model and the Merton Option Model ,
the former was found more accurate than the latter. GARCH Model relatively
improves average percentage mean squared errors of Merton Model ; one month
option shows fourty six point ninty six percent improvement, two month option
shows fifty seventh point twenty two percent and three month option shows
twenty three point twenty sevent percent.
Keywords
Barrier Option Derivative GARCH Option Model Merton Option Model Stock Option Contract Indonesian Stock Exchange.
References
- Black, F. and Scholes, M. (1973). “ The Pricing of Option and Corporate
- Liabilities “, Journal of Political Economy, Vol.81, No.3, pp. 637 – 654 Bollerslev, T. (1986). “ Generalized Autoregressive Conditional
- Heteroscedasticity “, Journal of Econometrics 31, 307-327. Duan, J.-C., (1995), “The GARCH Option Pricing Model,” Mathematical Finance , 13-32.
- Enders, Walter., ( 2004), “ Applied Econometrics Time Series “, John Wiley &
- Sons, Inc Publisher. 2nd Edition, New Jersey. Engle, R.F. (1982). “ Autoregressive conditional heteroskedasticity with estimates of the variance of U.K. inflation “ , Econometrica 50, 987-1008.
- Fofana . N. F and B.W. Brorsen, ( 2001 ), “ GARCH option pricing with implied volatility “ , Applied Economics Letters, 8, 335 – 340.
Abstract
References
- Black, F. and Scholes, M. (1973). “ The Pricing of Option and Corporate
- Liabilities “, Journal of Political Economy, Vol.81, No.3, pp. 637 – 654 Bollerslev, T. (1986). “ Generalized Autoregressive Conditional
- Heteroscedasticity “, Journal of Econometrics 31, 307-327. Duan, J.-C., (1995), “The GARCH Option Pricing Model,” Mathematical Finance , 13-32.
- Enders, Walter., ( 2004), “ Applied Econometrics Time Series “, John Wiley &
- Sons, Inc Publisher. 2nd Edition, New Jersey. Engle, R.F. (1982). “ Autoregressive conditional heteroskedasticity with estimates of the variance of U.K. inflation “ , Econometrica 50, 987-1008.
- Fofana . N. F and B.W. Brorsen, ( 2001 ), “ GARCH option pricing with implied volatility “ , Applied Economics Letters, 8, 335 – 340.
Details
| Other ID | JA99GD57GA |
|---|---|
| Journal Section | Articles |
| Authors | |
| Publication Date | June 1, 2011 |
| Published in Issue | Year 2011 Volume: 3 Issue: 1 |