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1、THEJOURNALOFFINANCE.VOL.LII,NO.5.DECEMBER1997EmpiricalPerformanceofAlternativeOptionPricingModelsGURDIPBAKSHI,CHARLESCAO,andZHIWUCHEN*ABSTRACTSubstantialprogresshasbeenmadeindevelopingmorerealisticoptionpricingmodels.Empirically,however,itisnotknownwhetherandbyhowmucheachgeneralizationimprovesopt
2、ionpricingandhedging.Wefillthisgapbyfirstderivinganoptionmodelthatallowsvolatility,interestratesandjumpstobestochastic.UsingS&P500options,weexamineseveralalternativemodelsfromthreeperspec-tives:(1)internalconsistencyofimpliedparameters/volatilitywithrelevanttime-seriesdata,(2)out-of-samplepricing
3、,and(3)hedging.Overall,incorporatingsto-chasticvolatilityandjumpsisimportantforpricingandinternalconsistency.Butforhedging,modelingstochasticvolatilityaloneyieldsthebestperformance.INTHELASTTWODECADES,optionpricinghaswitnessedanexplosionofnewmodelsthateachrelaxsomeoftherestrictiveBlack-Scholes(BS
4、)(1973)assumptions.Examplesinclude(i)thestochastic-interest-rateoptionmodelsofMerton(1973)andAminandJarrow(1992);(ii)thejump-diffusionlpurejumpmodelsofBates(1991),MadanandChang(1996),andMerton(1976);(iii)theconstant-elasticity-of-variancemodelofCoxandRoss(1976);(iv)theMark-ovianmodelsofRubinstein
5、(1994)andAlt-SahaliaandLo(1996);(v)thestochastic-volatilitymodelsofHeston(1993),HullandWhite(1987a),MelinoandTurnbull(1990,1995),Scott(1987),SteinandStein(1991),andWiggins(1987);(vi)thestochastic-volatilityandstochastic-interest-ratesmodelsofAminandNg(1993),BaileyandStulz(1989),BakshiandChen(1997
6、a,b),andScott(1997);and(vii)thestochastic-volatilityjump-diffusionmodelsofBates(1996a,c),andScott(1997).Thislistisbynomeansexhaustive,yetalreadyoverwhelmingtoanyonewhohastochooseamongthealternatives.Tomakemattersworse,thenumberofpossibleoptionpricingmodelsisvirtuallyinfinite.Notethateveryoptionpr
7、icingmodelhastomakethreebasicassump-*BakshiisattheUniversityofMaryland,CollegePark.CaoisatPennsylvaniaStateUniver-sity,UniversityPark.ChenisatTheOhioStateUniversity,Columbus.Thispapersubsumesthepreviousoneunderthetitle
