An Empirical Study on Implied GARCH Models

Abstract

An empirical study is employed to investigate the performance of implied GARCH models in option pricing. The implied GARCH models are established by either the Esscher transform or the extended Girsanov principle. The empirical P -martingale simulation is adopted to compute the options efficiently. The empirical results show that: (i) the implied GARCH models obtain accurate standard option prices even the innovations are conveniently assumed to be normal distributed; (ii) the Esscher transform describes the data better than the extended Girsanov principle; (iii) significant model risk arises when using implied GARCH model with non-proper innovations in exotic option pricing.