Title: An Empirical Test of the Variance Gamma Option Pricing Model
Reference Number: 1041
Publication Date: February 2002
JEL Classifcation: G13

K. Lam
Hong Kong Baptist University

E. Chang
The University of Hong Kong

M.C. Lee
The University of Hong Kong

In this paper, we test the 2-parameter symmetric variance gamma option pricing model and the 3-parameter asymmetric variance gamma option pricing model empirically. Prices of the Hang Seng Index call options which are of European style are used as the data for the empirical test. Since the VG option pricing model is developed for the pricing of European options, the empirical test gives a more conclusive answer than previous papers which used American option data to the applicability of the VG models. The present study uses a large number of intraday option data which span over a period of three years. Sychonous option and futures data are used throughout the study. Pairwise comparison between the accuracy of model prices are carried out using both parametric and non-parametric methods. The conclusion is that the VG models are useful models for option pricing and can produce model prices which approximate observed market prices better than the Black-Scholes approach.

Published in Pacific-Basin Finance Journal 10, 2002, pp. 267-285.

Key words: Option pricing, Variance gamma, Option pricing model, Volatility smiles, Hedging performance

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Last modified: 01/23/2007