An empirical test of the variance gamma option pricing model

K. Lam*, E. Chang, M. C. Lee

*Corresponding author for this work

Research output: Contribution to journalJournal articlepeer-review

10 Citations (Scopus)


In this paper, we test the three-parameter symmetric variance gamma (SVG) option pricing model and the four-parameter asymmetric variance gamma (AVG) 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 variance gamma 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 3 years. Synchronous option and futures data are used throughout the study. Pairwise comparisons between the accuracy of model prices are carried out using both parametric and nonparametric methods. The conclusion is that the VG option pricing model performs marginally better than the Black-Scholes (BS) model. Under the historical approach, the VG models can moderately iron out some of the systematic biases inherent in the BS model. However, under the implied approach, the VG models continue to exhibit predictable biases and its overall performance in pricing and hedging is still far less than desirable.

Original languageEnglish
Pages (from-to)267-285
Number of pages19
JournalPacific Basin Finance Journal
Issue number3
Publication statusPublished - Jun 2002
Externally publishedYes

Scopus Subject Areas

  • Finance
  • Economics and Econometrics

User-Defined Keywords

  • Hedging performance
  • Option pricing
  • Option pricing model
  • Variance gamma
  • Volatility smiles


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