Specification Analysis of Option Pricing Models Based on Time- Changed Levy Processes

Jingzhi Huang and Liuren Wu ()
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Jingzhi Huang: Penn State

Finance from EconWPA

Abstract: We analyze the specifications of option pricing models based on time- changed Levy processes. We classify option pricing models based on the structure of the jump component in the underlying return process, the source of stochastic volatility, and the specification of the volatility process itself. Our estimation of a variety of model specifications indicates that to better capture the behavior of the S&P 500 index options, we need to incorporate a high frequency jump component in the return process and generate stochastic volatilities from two different sources, the jump component and the diffusion component.

Keywords: Option pricing; Levy processes; time change; jumps; Diffusion; stochastic volatility; finite activity; infinite activity; infinite variation. (search for similar items in EconPapers)
JEL-codes: G (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-fin, nep-fmk and nep-rmg
Date: 2004-01-08
Note: Type of Document - pdf; prepared on WinXP; pages: 48; figures: 3
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http://129.3.20.41/eps/fin/papers/0401/0401002.pdf (application/pdf)

Related works:
Working Paper: Specification Analysis of Option Pricing Models Based on Time-Changed Levy Processes (2004)
Journal Article: Specification Analysis of Option Pricing Models Based on Time-Changed Lévy Processes (2004)
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0401002

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