Option pricing in a Garch model with tempered stable innovations
The key problem for option pricing in Garch models is that the risk-neutral distribution of the underlying at maturity is unknown. Heston and Nandi solved this problem by computing the characteristic function of the underlying by a recursive procedure. Following the same idea, Christoffersen, Heston and Jacobs proposed a Garch-like model with inverse Gaussian innovations and recently Bellini and Mercuri obtained a similar procedure in a model with Gamma innovations. We present a model with tempered stable innovations that encompasses both the CHJ and the BM models as special cases. The proposed model is calibrated on S&P500 closing option prices and its performance is compared with the CHJ, the BM and the Heston-Nandi models.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Peter Carr & Liuren Wu, 2003.
"The Finite Moment Log Stable Process and Option Pricing,"
Journal of Finance,
American Finance Association, vol. 58(2), pages 753-778, 04.
- Peter Carr & Liuren Wu, 2002. "The Finite Moment Log Stable Process and Option Pricing," Finance 0207012, EconWPA.
- Christoffersen, Peter & Heston, Steve & Jacobs, Kris, 2006. "Option valuation with conditional skewness," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 253-284.
- Peter Christoffersen & Steve Heston & Kris Jacobs, 2003. "Option Valuation with Conditional Skewness," CIRANO Working Papers 2003s-50, CIRANO.
- Benoit Mandelbrot, 1963. "New Methods in Statistical Economics," Journal of Political Economy, University of Chicago Press, vol. 71, pages 421-421.
- Heston, Steven L & Nandi, Saikat, 2000. "A Closed-Form GARCH Option Valuation Model," Review of Financial Studies, Society for Financial Studies, vol. 13(3), pages 585-625.
- Jin-Chuan Duan, 1995. "The Garch Option Pricing Model," Mathematical Finance, Wiley Blackwell, vol. 5(1), pages 13-32. Full references (including those not matched with items on IDEAS)