Option Pricing in a Dynamic Variance-Gamma Model
We present a discrete time stochastic volatility model in which the conditional distribution of the logreturns is a Variance-Gamma, that is a normal variance-mean mixture with Gamma mixing density. We assume that the Gamma mixing density is time varying and follows an affine Garch model, trying to capture persistence of volatility shocks and also higher order conditional dynamics in a parsimonious way. We select an equivalent martingale measure by means of the conditional Esscher transform as in Buhlmann et al. (1996) and show that this change of measure leads to a similar dynamics of the mixing distribution. The model admits a recursive procedure for the computation of the characteristic function of the terminal logprice, thus allowing semianalytical pricing as in Heston and Nandi (2000). From an empirical point of view, we check the ability of this model to calibrate SPX option data and we compare it with the Heston and Nandi (2000) model and with the Christoffersen, Heston and Jacobs (2006) model, that is based on Inverse Gaussian innovations. Moreover, we provide a detailed comparison with several variants of the Heston and Nandi model that shows the superiority of the Variance-Gamma innovations also from the point of view of historical MLE estimation.
|Date of creation:||May 2014|
|Date of revision:|
|Publication status:||Published in Journal of Financial Decision Making (2011) vol. 7, n.1 pp. 37-51 - ISSN: 1790-4870|
|Contact details of provider:|| Web page: http://arxiv.org/|
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.:
- Charles Quanwei Cao & Gurdip S. Bakshi & Zhiwu Chen, 1997.
"Empirical Performance of Alternative Option Pricing Models,"
Yale School of Management Working Papers
ysm65, Yale School of Management.
- Bakshi, Gurdip & Cao, Charles & Chen, Zhiwu, 1997. " Empirical Performance of Alternative Option Pricing Models," Journal of Finance, American Finance Association, vol. 52(5), pages 2003-49, December.
- Charles Quanwei Cao & Gurdip S. Bakshi & Zhiwu Chen, 1997. "Empirical Performance of Alternative Option Pricing Models," Yale School of Management Working Papers ysm54, Yale School of Management.
- repec:spr:compst:v:69:y:2009:i:3:p:411-438 is not listed on IDEAS
- Christophe Chorro & Dominique Guegan & Florian Ielpo, 2008.
"Option pricing under GARCH models with generalized hyperbolic innovations (I) : methodology,"
Documents de travail du Centre d'Economie de la Sorbonne
b08037, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
- Christophe Chorro & Dominique Guegan & Florian Ielpo, 2008. "Option Pricing under GARCH models with Generalized Hyperbolic innovations (I) : Methodology," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00281585, HAL.
- Madan, Dilip B & Seneta, Eugene, 1990. "The Variance Gamma (V.G.) Model for Share Market Returns," The Journal of Business, University of Chicago Press, vol. 63(4), pages 511-24, October.
- Boyle, Phelim P., 1977. "Options: A Monte Carlo approach," Journal of Financial Economics, Elsevier, vol. 4(3), pages 323-338, May.
- Christophe Chorro & Dominique Guegan & Florian Ielpo, 2008. "Option pricing under GARCH models with generalized hyperbolic innovations (II) : data and results," Documents de travail du Centre d'Economie de la Sorbonne b08047, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
- Peter Christoffersen & Steve Heston & Kris Jacobs, 2003.
"Option Valuation with Conditional Skewness,"
CIRANO Working Papers
- Mercuri, Lorenzo, 2008. "Option pricing in a Garch model with tempered stable innovations," Finance Research Letters, Elsevier, vol. 5(3), pages 172-182, September.
- Clark, Peter K, 1973. "A Subordinated Stochastic Process Model with Finite Variance for Speculative Prices," Econometrica, Econometric Society, vol. 41(1), pages 135-55, January.
- Geman, Helyette, 2002. "Pure jump Levy processes for asset price modelling," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1297-1316, July.
- Friedrich Hubalek & Carlo Sgarra, 2006. "Esscher transforms and the minimal entropy martingale measure for exponential Levy models," Quantitative Finance, Taylor & Francis Journals, vol. 6(2), pages 125-145.
When requesting a correction, please mention this item's handle: RePEc:arx:papers:1405.7342. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators)
If references are entirely missing, you can add them using this form.