Option pricing in a Garch model with tempered stable innovations
AbstractThe key problem for option pricing in Garch models is that the risk-neutral distribution of the underlying at maturity is unknown. Heston and Nandi solved this problem by computing the characteristic function of the underlying by a recursive procedure. Following the same idea, Christoffersen, Heston and Jacobs proposed a Garch-like model with inverse Gaussian innovations and recently Bellini and Mercuri obtained a similar procedure in a model with Gamma innovations. We present a model with tempered stable innovations that encompasses both the CHJ and the BM models as special cases. The proposed model is calibrated on S&P500 closing option prices and its performance is compared with the CHJ, the BM and the Heston-Nandi models.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Finance Research Letters.
Volume (Year): 5 (2008)
Issue (Month): 3 (September)
Contact details of provider:
Web page: http://www.elsevier.com/locate/frl
Option pricing Garch Tempered stable distribution Semi-analytical valuation Esscher transform;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Peter Christoffersen & Steve Heston & Kris Jacobs, 2003.
"Option Valuation with Conditional Skewness,"
CIRANO Working Papers
- Peter Carr & Liuren Wu, 2003.
"The Finite Moment Log Stable Process and Option Pricing,"
Journal of Finance,
American Finance Association, vol. 58(2), pages 753-778, 04.
- Peter Carr & Liuren Wu, 2002. "The Finite Moment Log Stable Process and Option Pricing," Finance 0207012, EconWPA.
- Benoit Mandelbrot, 1963. "New Methods in Statistical Economics," Journal of Political Economy, University of Chicago Press, vol. 71, pages 421.
- Jin-Chuan Duan, 1995. "The Garch Option Pricing Model," Mathematical Finance, Wiley Blackwell, vol. 5(1), pages 13-32.
- Heston, Steven L & Nandi, Saikat, 2000. "A Closed-Form GARCH Option Valuation Model," Review of Financial Studies, Society for Financial Studies, vol. 13(3), pages 585-625.
- Shin Kim, Young & Rachev, Svetlozar T. & Leonardo Bianchi, Michele & Fabozzi, Frank J., 2010.
"Tempered stable and tempered infinitely divisible GARCH models,"
Journal of Banking & Finance,
Elsevier, vol. 34(9), pages 2096-2109, September.
- Kim, Young Shin & Rachev, Svetlozar T. & Bianchi, Michele Leonardo & Fabozzi, Frank J., 2011. "Tempered stable and tempered infinitely divisible GARCH models," Working Paper Series in Economics 28, Karlsruhe Institute of Technology (KIT), Department of Economics and Business Engineering.
- Christophe Chorro & Dominique Guegan & Florian Ielpo, 2010. "Martingalized Historical approach for Option Pricing," Post-Print halshs-00437927, HAL.
- Chorro, C. & Guégan, D. & Ielpo, F., 2010.
"Martingalized historical approach for option pricing,"
Finance Research Letters,
Elsevier, vol. 7(1), pages 24-28, March.
- Christophe Chorro & Dominique Guegan & Florian Ielpo, 2010. "Martingalized Historical approach for Option Pricing," UniversitÃ© Paris1 PanthÃ©on-Sorbonne (Post-Print and Working Papers) halshs-00437927, HAL.
- Christophe Chorro & Dominique Guegan & Florian Ielpo, 2009. "Martingalized Historical approach for Option Pricing," UniversitÃ© Paris1 PanthÃ©on-Sorbonne (Post-Print and Working Papers) halshs-00376756, HAL.
- Christophe Chorro & Dominique Guegan & Florian Ielpo, 2009. "Martingalized historical approach for option pricing," Documents de travail du Centre d'Economie de la Sorbonne 09021, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
- Küchler, Uwe & Tappe, Stefan, 2013. "Tempered stable distributions and processes," Stochastic Processes and their Applications, Elsevier, vol. 123(12), pages 4256-4293.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.