Volatility and Variance Swap Using Superposition of the Barndorff-Nielsen and Shephard type Lévy Processes

Semere Habtemicael (), Musie Ghebremichael () and Indranil SenGupta ()
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Semere Habtemicael: Wentworth Institute of Technology
Musie Ghebremichael: Harvard Medical School
Indranil SenGupta: North Dakota State University

Sankhya B: The Indian Journal of Statistics, 2019, vol. 81, issue 1, No 5, 75-92

Abstract: Abstract The main goal of this paper is to model variance and volatility swap using superposition of Barndorff-Nielsen and Shephard (BN-S) type models. In particular, in this paper we propose superposition of Lévy process driven by Γ(ν,α) and Inverse Gaussian distributions. Model performance is assessed on data not used to build the model (i.e., test data). It is shown that the prediction error rate for the models considered in this paper are much lower compared to those from previous related models. Moreover, it is shown that unlike previous related models which are restricted to stable markets, the present approach can be applied to both stable and unstable markets.

Keywords: Swap; Cumulants; Stochastic volatility; Ornstein-Uhlenbeck process; Superposition; Cross validation; Primary 60G10; 60G51; Secondary 91G70; 91G80 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (5)

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DOI: 10.1007/s13571-017-0145-y

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