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Specification Analysis of Option Pricing Models Based on Time- Changed Levy Processes

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Author Info

  • Jingzhi Huang

    (Penn State)

  • Liuren Wu

    (Baruch College)

Abstract

We analyze the specifications of option pricing models based on time- changed Levy processes. We classify option pricing models based on the structure of the jump component in the underlying return process, the source of stochastic volatility, and the specification of the volatility process itself. Our estimation of a variety of model specifications indicates that to better capture the behavior of the S&P 500 index options, we need to incorporate a high frequency jump component in the return process and generate stochastic volatilities from two different sources, the jump component and the diffusion component.

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File URL: http://128.118.178.162/eps/fin/papers/0401/0401002.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 0401002.

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Length: 48 pages
Date of creation: 08 Jan 2004
Date of revision:
Handle: RePEc:wpa:wuwpfi:0401002

Note: Type of Document - pdf; prepared on WinXP; pages: 48; figures: 3
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Web page: http://128.118.178.162

Related research

Keywords: Option pricing; Levy processes; time change; jumps; Diffusion; stochastic volatility; finite activity; infinite activity; infinite variation.;

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References

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