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

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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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Publisher Info
Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00281585_v1.

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Date of creation: May 2008
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Handle: RePEc:hal:cesptp:halshs-00281585_v1

Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00281585/en/
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Related research
Keywords: GARCH; Generalized Hyperbolic Distribution; pricing; risk neutral distribution.;

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This page was last updated on 2009-6-30.

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