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Option pricing under GARCH models with generalized hyperbolic innovations (I) : methodology

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Author Info
Christophe Chorro () (Centre d'Economie de la Sorbonne)
Dominique Guegan () (Centre d'Economie de la Sorbonne - Paris School of Economics)
Florian Ielpo () (Centre d'Economie de la Sorbonne et 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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File URL: ftp://mse.univ-paris1.fr/pub/mse/CES2008/B08037.pdf
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Publisher Info
Paper provided by Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne in its series Documents de travail du Centre d'Economie de la Sorbonne with number b08037.

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Length: 21 pages
Date of creation: May 2008
Date of revision:
Handle: RePEc:mse:cesdoc:b08037

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Web page: http://ces.univ-paris1.fr/
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Related research
Keywords: GARCH; Generalized Hyperbolic Distribution; pricing; risk neutral distribution.;

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Find related papers by JEL classification:
C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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This page was last updated on 2009-11-23.

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