Correcting for risk premium on extended generalised Leland models: an empirical study on Dow Jones Industrial Average (DJIA) index options

Harun, Hanani Farhah and Abdullah, Mimi Hafizah (2021) Correcting for risk premium on extended generalised Leland models: an empirical study on Dow Jones Industrial Average (DJIA) index options. In: 28th Simposium Kebangsaan Sains Matematik, SKSM 2021, 28-29 Jul 2021, Virtual.

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Abstract

The relative option pricing performance of Extended Generalised Leland models is examined in this study. We generalise the extended Leland models based on the implied adjusted volatility introduced in the models. Non-parametric framework is fitted into parametric option-pricing framework based on the Leland models to achieve a more realistic option pricing. To reflect the real probability measure, the implied adjusted information is corrected in terms of risk premium. This study concentrates mainly in examining the option-implied information produced by the models after correcting for risk-premium. Data extracted from DJIA index options are employed in this study, which covers the period from January 2009 until the end of 2015. We discovered that the option-implied volatility, which is priced using the Extended Generalised Leland models, especially after being corrected for risk premium factor improves the option valuation accuracy significantly.

Item Type:	Conference or Workshop Item (Plenary Papers)
Additional Information:	4482/93600
Uncontrolled Keywords:	Leland models, risk premium, empirical study
Subjects:	Q Science > QA Mathematics
Kulliyyahs/Centres/Divisions/Institutes (Can select more than one option. Press CONTROL button):	Kulliyyah of Science > Department of Computational and Theoretical Sciences Kulliyyah of Science
Depositing User:	Ms Mimi Hafizah Abdullah
Date Deposited:	10 Nov 2021 08:39
Last Modified:	10 Nov 2021 08:39
URI:	http://irep.iium.edu.my/id/eprint/93600

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