TY - JOUR AU - Bates,David S. TI - Testing Option Pricing Models JF - National Bureau of Economic Research Working Paper Series VL - No. 5129 PY - 1995 Y2 - May 1995 DO - 10.3386/w5129 UR - http://www.nber.org/papers/w5129 L1 - http://www.nber.org/papers/w5129.pdf N1 - Author contact info: David S. Bates Henry B. Tippie College of Business Department of Finance University of Iowa Iowa City, IA 52242-1000 Tel: 319/353-2288 Fax: 319/335-3690 E-Mail: david-bates@uiowa.edu AB - This paper discusses the commonly used methods for testing option pricing models, including the Black-Scholes, constant elasticity of variance, stochastic volatility, and jump-diffusion models. Since options are derivative assets, the central empirical issue is whether the distributions implicit in option prices are consistent with the time series properties of the underlying asset prices. Three relevant aspects of consistency are discussed, corresponding to whether time series-based inferences and option prices agree with respect to volatility, changes in volatility, and higher moments. The paper surveys the extensive empirical literature on stock options, options on stock indexes and stock index futures, and options on currencies and currency futures. ER -