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A Spectral Estimation of Tempered Stable Stochastic Volatility Models and Option Pricing

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  • Junye Lia
  • Carlo Favero
  • Fulvio Ortu

Abstract

A characteristic function-based method is proposed to estimate the time-changed L´evy models, which take into account both stochastic volatility and infinite-activity jumps. The method facilitates computation and overcomes problems related to the discretization error and to the non-tractable probability density. Estimation results and option pricing performance indicate that the infiniteactivity model performs better than the finite-activity one. By introducing a jump component in the volatility process, a double-jump model is also investigated.

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Bibliographic Info

Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 370.

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Date of creation: 2010
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Handle: RePEc:igi:igierp:370

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Cited by:
  1. Rachidi Kotchoni, 2013. "The Indirect Continuous-GMM Estimation," Working Papers hal-00867804, HAL.
  2. Manuel Moreno & Pedro Jose Serrano & Winfried Stute, 2008. "Statistical Properties and Economic Implications of Jump-Diffusion Processes with Shot-Noise Effects," Business Economics Working Papers wb084912, Universidad Carlos III, Departamento de Economía de la Empresa.
  3. Zaevski, Tsvetelin S. & Kim, Young Shin & Fabozzi, Frank J., 2014. "Option pricing under stochastic volatility and tempered stable Lévy jumps," International Review of Financial Analysis, Elsevier, vol. 31(C), pages 101-108.

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