Daniela Stanculea

Background

About Daniela Stanculea

Thesis Abstract The role of GARCH models in option pricing This thesis aims to examine the role of GARCH models within option pricing models. The paper describes the econometric models used in literature to estimate volatility and why it is important in finance. Subsequently, various option pricing models are discussed, with particular attention to Duan's (1995) GARCH option pricing model. After conducting an accurate descriptive analysis to assess the characteristics of the reference data, implementations of the Black & Scholes and Duan models have been carried out. Two versions of the Black & Scholes model have been considered. The first considers the historical volatility, and the second considers the average of the volatility term structure in a GARCH framework. Four versions of the Duan model have been used, Duan with implied dividends, Duan with constant dividends, Duan without dividends, and finally, Duan with implied dividends and Student's t-distribution errors. The aim is to evaluate, under different assumptions, the performance of the pricing models in pricing options written on the WIG20 index traded on the Warsaw Stock Exchange and the various implications thereof. The results show that the most accurate model is Black & Scholes with historical volatility, followed by the Black & Scholes model with a term structure of volatility, and finally, the Duan model with Student's t-distribution errors. Finally, the paper aims to highlight that the accuracy of pricing models is influenced by various factors, including implied volatility, assumptions about the dividend yield, market liquidity, and volatility estimation techniques. The implementation was carried out using RStudio software and Microsoft Excel. The data used was downloaded from Bloomberg and Factset.