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Title: Volatility estimation of underlying assets for valuing low liquidity call options
Authors: Manowattanakul, R. 
Boonvorachote, T. 
Keywords: BlackScholesmodel;GARCH model;Historical model
Issue Date: 2015
Publisher: Scopus
University of the Thai Chamber of Commerce
Source: R. Manowattanakul, T. Boonvorachote (2015) Volatility estimation of underlying assets for valuing low liquidity call options. Kasetsart Journal Social Sciences Vol.36 No.2, 244-257.
Abstract: This study explored optimal models for estimating the implied volatility of the SET50 index on the Thailand Futures Exchange (TFEX). Our data covered a 12yearperiod from Jan 1, 2000 to Dec 31, 2011. The volatilityestimating models used were GARCH (1,1) and historical models. Our results showed that oneday,lagged, historical volatility is equivalent to the conditional variance form of the GARCH (1,1) model. We used estimated volatility from both the GARCH (1,1) and historical models for pricing call options with the BlackScholes model. We also compared estimated call option values to actual call option market prices. Our results showed that 6 month historical volatility outperforms for estimating call option values compared to the conditional variance from the GARCH (1,1) model. Because call option trading liquidity on the TFEXis low, therefore, call option values estimated using constant implied volatility from longperiod historical volatility ares superior to call option value estimation using timevarying volatility. In order to boost financial risk management by using derivatives on the TFEX, exchange regulators should focus on an increase in derivatives trading liquidity.
Rights: This work is protected by copyright. Reproduction or distribution of the work in any format is prohibited without written permission of the copyright owner.
Appears in Collections:RSO: Journal Articles

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