6.8. FURTHER RESOURCES

This chapter has focused on option pricing in discrete time in order to remain consistent with the previous chapters. There are many excellent textbooks on options. A popular example is Hull (2002). The classic papers on the BSM model are Black and Scholes (1973) and Merton (1973). The discrete time derivations in this chapter were introduced in Rubenstein (1976) and Brennan (1979). Merton (1976) introduced a continuous time diffusion model with jumps allowing for kurtosis in the distribution of returns. See Andersen and Andreasen (2000) for some recent extensions to Merton s (1976) model. The GC model is derived in Backus et al. (1997). The general GARCH option pricing framework is introduced in Duan (1995). Duan and Simonato (1998) discussed Monte Carlo simulation techniques for the GARCH model and Duan et al. (1999) contains an analytical approximation to the GARCH model price. Ritchken and Trevor (1999) suggest a trinomial tree method for calculating the GARCH option price. Duan (1999) discusses extensions to the GARCH option pricing model allowing for conditionally non-normal returns. The closed-form GARCH option pricing model is derived in Heston and Nandi (2000). Christoffersen and Jacobs (2002) compares the empirical performance of various GARCH variance specifications for option pricing and found that the simple variance specification including a leverage effect as applied in this chapter works very well compared with the BSM model. Hsieh and Ritchken (2000) compare the GARCH (GH) and the closed-form GARCH (CFG) models and find that the GH model perform...