Canonical valuation of options in the presence of stochastic volatility

Gray, P. and Newman, S. (2005) Canonical valuation of options in the presence of stochastic volatility. Journal of Futures Markets, 25 1: 1-19. doi:10.1002/fut.20140

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Author Gray, P.
Newman, S.
Title Canonical valuation of options in the presence of stochastic volatility
Journal name Journal of Futures Markets   Check publisher's open access policy
ISSN 0270-7314
Publication date 2005
Sub-type Article (original research)
DOI 10.1002/fut.20140
Volume 25
Issue 1
Start page 1
End page 19
Total pages 19
Editor R. T. Webb
Place of publication USA
Publisher John Wiley & Sons
Collection year 2005
Language eng
Subject C1
350301 Finance
710401 Finance and investment services
Abstract Proposed by M. Stutzer (1996), canonical valuation is a new method for valuing derivative securities under the risk-neutral framework. It is non-parametric, simple to apply, and, unlike many alternative approaches, does not require any option data. Although canonical valuation has great potential, its applicability in realistic scenarios has not yet been widely tested. This article documents the ability of canonical valuation to price derivatives in a number of settings. In a constant-volatility world, canonical estimates of option prices struggle to match a Black-Scholes estimate based on historical volatility. However, in a more realistic stochastic-volatility setting, canonical valuation outperforms the Black-Scholes model. As the volatility generating process becomes further removed from the constant-volatility world, the relative performance edge of canonical valuation is more evident. In general, the results are encouraging that canonical valuation is a useful technique for valuing derivatives. (C) 2005 Wiley Periodicals, Inc.
Keyword Business, Finance
Currency Options
Q-Index Code C1

Document type: Journal Article
Sub-type: Article (original research)
Collections: Excellence in Research Australia (ERA) - Collection
2006 Higher Education Research Data Collection
UQ Business School Publications
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Citation counts: TR Web of Science Citation Count  Cited 15 times in Thomson Reuters Web of Science Article | Citations
Scopus Citation Count Cited 13 times in Scopus Article | Citations
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Created: Wed, 15 Aug 2007, 05:23:54 EST