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Option Pricing under GARCH models with Generalized Hyperbolic innovations (I) : Methodology

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Author Info

  • Christophe Chorro

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)

  • Dominique Guegan

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

  • Florian Ielpo

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, DEXIA - DEXIA S.A.)

Abstract

In this paper, we present an alternative to the Black Scholes model for a discrete time economy using GARCH-type models for the underlying asset returns with Generalized Hyperbolic (GH) innovations that are potentially skewed and leptokurtic. Assuming that the stochastic discount factor is an exponential affine function of the states variables, we show that this class of distributions is stable under the Risk neutral change of probability.

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Bibliographic Info

Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00281585.

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Date of creation: May 2008
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Handle: RePEc:hal:cesptp:halshs-00281585

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Related research

Keywords: GARCH; Generalized Hyperbolic Distribution; pricing; risk neutral distribution.;

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Cited by:
  1. repec:hal:journl:hal-00308687 is not listed on IDEAS
  2. Christophe Chorro & Dominique Guegan & Florian Ielpo, 2009. "Martingalized Historical approach for Option Pricing," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00376756, HAL.
  3. Lorenzo Mercuri & Fabio Bellini, 2014. "Option Pricing in a Dynamic Variance-Gamma Model," Papers 1405.7342, arXiv.org.

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