GENERALIZED BN–S STOCHASTIC VOLATILITY MODEL FOR OPTION PRICING

Indranil Sengupta ()
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Indranil Sengupta: Department of Mathematics, North Dakota State University, NDSU Dept # 2750, Minard Hall 408E12, Fargo, ND 58108-6050, USA

International Journal of Theoretical and Applied Finance (IJTAF), 2016, vol. 19, issue 02, 1-23

Abstract: In this paper, a class of generalized Barndorff-Nielsen and Shephard (BN–S) models is investigated from the viewpoint of derivative asset analysis. Incompleteness of this type of markets is studied in terms of equivalent martingale measures (EMM). Variance process is studied in details for the case of Inverse-Gaussian distribution. Various structure preserving subclasses of EMMs are derived. The model is then effectively used for pricing European style options and fitting implied volatility smiles.

Keywords: Martingale measures; Ornstein–Uhlenbeck type process; option pricing; Inverse-Gaussian distribution; volatility smile (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (11)

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DOI: 10.1142/S021902491650014X

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