When it comes to individual stock option pricing, most applications consider a univariate framework. From a theoretical point of view this is unsatisfactory as we know that the expected return of any asset is closely related to the exposure to the market risk factors.
To address this, we model the evolution of the individual stock returns together with the market index returns in a flexible bivariate model in line with theory. We assess the model performance by pricing a large set of individual stock options on 26 major US stocks over a long time period including the global financial crisis.
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