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Article

What Drives Option Prices?

Frédéric Abergel and Riadh Zaatour
The Journal of Trading Summer 2012, 7 (3) 12-28; DOI: https://doi.org/10.3905/jot.2012.7.3.012
Frédéric Abergel
is the chair of quantitative finance at Ecole Centrale Paris in Châtenay-Malabry, France.
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  • For correspondence: frederic.abergel@ecp.fr
Riadh Zaatour
is a Ph.D. student at Ecole Centrale Paris in Châtenay-Malabry, France.
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  • For correspondence: zaatour_riadh@yahoo.fr
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Abstract

We rely on high frequency data to explore the joint dynamics of underlying and option markets. In particular, high frequency data make observable the realized variance process of the underlying markets, so its effects on option price dynamics are tested. Empirical results are confronted with the predictions of stochastic volatility models. The study reveals that while the modeling of stochastic volatility gives more robust models, the market does not process information on the realized variance to update option prices.

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The Journal of Trading: 7 (3)
The Journal of Trading
Vol. 7, Issue 3
Summer 2012
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What Drives Option Prices?
Frédéric Abergel, Riadh Zaatour
The Journal of Trading Jun 2012, 7 (3) 12-28; DOI: 10.3905/jot.2012.7.3.012

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What Drives Option Prices?
Frédéric Abergel, Riadh Zaatour
The Journal of Trading Jun 2012, 7 (3) 12-28; DOI: 10.3905/jot.2012.7.3.012
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  • Article
    • Abstract
    • THE DATA
    • THEORETICAL FRAMEWORK
    • INTRADAY JOINT DYNAMICS OF OPTION AND UNDERLYING PRICES
    • STOCHASTIC VOLATILITY MODEL PREDICTIONS
    • SEVERAL-DAY ANALYSIS: IMPLIED VOLATILITY PERSPECTIVE
    • CONCLUSION
    • ENDNOTES
    • REFERENCES
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