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• W3197351487 abstract "• A novel high-frequency data set with over one million option trades and orders. • Comparison of options’ implied parameters of Brownian motion and VG process. • A significant part of the implied volatility smile can be explained by VG process. • High sensitivity of option prices derived by VG process regarding parameter changes. • Inferior out-of-sample performance of VG process in relation to Brownian motion. Advanced stochastic approaches are often suggested as a solution to real-world derivative pricing inconsistencies like the non-linearity of the implied volatility smile. Using a novel high-frequency data set with over one million option trades and corresponding order books from the German market, we compare the normal distribution approach with a variance gamma process, which is – as a pure jump process – especially suitable for tick-by-tick data. We are able to report a flattened implied volatility smile with the variance gamma process. Other low-frequency results like time, information, and underlying moment dependencies for both stochastic processes are unchanged. All in-sample residuals of the normal distribution have a smaller variance below the 1% significance level compared to the variance gamma process. Additionally, we reveal a mean-reversion process. We show that the normal distribution is superior to the variance gamma process in an out-of-sample context and conclude that – even in a high-frequency environment – it is still “a country for old distributions”." @default.
• W3197351487 created "2021-09-13" @default.
• W3197351487 creator A5017830792 @default.
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• W3197351487 date "2021-09-01" @default.
• W3197351487 modified "2023-09-24" @default.
• W3197351487 title "No country for old distributions? On the comparison of implied option parameters between the Brownian motion and variance gamma process" @default.
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• W3197351487 doi "https://doi.org/10.1016/j.qref.2021.08.004" @default.
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