Discussion for Chen and Gau (2004) : Pricing Currency Options under Stochastic Volatility
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Discussion for Chen and Gau (2004) : Pricing Currency Options under Stochastic Volatility by Yaw-huei Wang. A potentially interesting paper Summary: Motivation: A lognormal density fails to fit market prices.

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Discussion for Chen and Gau (2004) : Pricing Currency Options under Stochastic Volatilityby Yaw-huei Wang

  • A potentially interesting paper

  • Summary:

    • Motivation: A lognormal density fails to fit market prices.

    • Objective: Comparing the performance of a constant and a stochastic volatility model for FX option pricing.

    • Models: Garman & Kohlhagen v.s. Heston

    • Findings:

      • (1) Heston’s model outperforms

      • (2) Speed of volatility mean reverting for FX is faster

      • (3) FX exhibits less negatively skewed.


  • Questions & Comments:

    • Reader-friendly presentation in the article.

    • Sophisticated data processing.

      • Synchronization, Transformation from American to European, Abandon short-time-to-maturity data … etc.

    • Comparison of models’ performance is interesting. But, comparison of economic meanings implied in a good model could be more interesting, particularly for different assets.

    • Does jumps matter? Jumps in returns or volatility, or both?

      • Empirical implementations of a jump stochastic volatility model for pricing FX options could be interesting?


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