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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.

Suggested Citation

  • Junye Lia & Carlo Favero & Fulvio Ortu, 2010. "A Spectral Estimation of Tempered Stable Stochastic Volatility Models and Option Pricing," Working Papers 370, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  • Handle: RePEc:igi:igierp:370
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    References listed on IDEAS

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    Cited by:

    1. Gong, Xiaoli & Zhuang, Xintian, 2017. "American option valuation under time changed tempered stable Lévy processes," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 466(C), pages 57-68.
    2. 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.
    3. Kotchoni, Rachidi, 2014. "The indirect continuous-GMM estimation," Computational Statistics & Data Analysis, Elsevier, vol. 76(C), pages 464-488.
    4. Moreno, Manuel & Serrano, Pedro & Stute, Winfried, 2011. "Statistical properties and economic implications of jump-diffusion processes with shot-noise effects," European Journal of Operational Research, Elsevier, vol. 214(3), pages 656-664, November.

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