An Empirical Comparison of Option Valuation Approaches: The Case of KOSPI 200 Options

This paper examines the empirical performance of two option valuation approaches: the pricing model-based option valuation approach, which is based on the direct specification of the option pricing models, and the implied pricing kernel-based option valuation approach, which is based on pricing kernels implied by option pricing models under the unified GARCH framework. In terms of parameter estimates obtained from the underlying returns-based estimation, the pricing model-based approach always outperforms the implied pricing kernel-based approach. However, in terms of parameter estimates obtained from the option-based estimation, the implied pricing kernel-based approach outperforms the pricing modelbased approach in pricing OTM options in the case of the GARCH option pricing model, and both of the option valuation approaches supported by the Black-Scholes option pricing model, which are generally poor performers, perform better than those option valuation approaches supported by the GARCH option pricing model in pricing ITM options and show similar performance in hedging.