Options valuation and calibration for leveraged exchange-traded funds with Heston–Nandi and inverse Gaussian GARCH models

Hongkai Cao (), Rupak Chatterjee () and Zhenyu Cui
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Hongkai Cao: School of Business, Stevens Institute of Technology, Hoboken, NJ 07030, United States
Rupak Chatterjee: Department of Physics and Center for Quantum Science and Engineering, Stevens Institute of Technology, Hoboken, NJ 07030, United States
Zhenyu Cui: School of Business and Center for Quantum Science and Engineering, Stevens Institute of Technology, Hoboken, NJ 07030, United States

International Journal of Financial Engineering (IJFE), 2019, vol. 06, issue 03, 1-37

Abstract: Leveraged exchange-traded funds (LETF) are newly introduced ETFs that have become increasingly popular. It closely tracks the value of an underlying index while allowing for additional leverage. In this paper, we consider the valuation of options written on LETF under two popular affine GARCH models, the Heston–Nandi model and the inverse Gaussian GARCH model. We also calibrate the two models using market data, and demonstrate the superior pricing performance.

Keywords: GARCH model; LETF options; Heston–Nandi; inverse Gaussian; calibration (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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DOI: 10.1142/S2424786319500270

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