PRICING NIKKEI 225 OPTIONS USING REALIZED VOLATILITY

摘要

This article examines option pricing performance using realized volatilities with or without handling microstructure noise, non-trading hours and large jumps. The dynamics of realized volatility is specified by ARFIMA(X) and HAR(X) models. The main results using put options on the Nikkei 225 index are that: (ⅰ) the ARFIMAX model performs best; (ⅱ) the Hansen and Lunde (2005a) adjustment for non-trading hours improves the performance; (ⅲ) methods for reducing microstructure noise-induced bias yield better performance, while if the Hansen-Lunde adjustment is used, the other methods are not necessarily needed; and (ⅳ) the performance is unaffected by removing large jumps from realized volatility.