Option pricing and hedging for optimized Lévy driven stochastic volatility models

Xiao-li Gong and Xin-tian Zhuang

Chaos, Solitons & Fractals, 2016, vol. 91, issue C, 118-127

Abstract: This paper pays attention to Ornstein-Uhlenbeck (OU) based stochastic volatility models with marginal law given by Classical Tempered Stable (CTS) distribution and Normal Inverse Gaussian (NIG) distribution, which are subclasses of infinite activity Lévy processes and are compared to finite activity Barndorff-Nielsen and Shephard (BNS) model. They are applied to option pricing and hedging in capturing leptokurtic features in asset returns and clustering effect in volatility that are consistently observed phenomena in underlying asset dynamics. The analytical formula of option pricing can be obtained through use of characteristic functions and Fast Fourier Transform (FFT) technique. Additionally, we introduce two hybrid optimization techniques such as hybrid Particle Swarm optimization (PSO) algorithm and hybrid Differential Evolution (DE) algorithm into parameters calibration schemes to improve the calibration quality for newly constructed models. Finally, we conduct experiments on Chinese emerging option markets to examine the performance of proposed models exploiting hybrid optimization techniques.

Keywords: OU process; Infinite activity Lévy jumps; Hybrid PSO and DE optimization; Option pricing and hedging (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:chsofr:v:91:y:2016:i:c:p:118-127

DOI: 10.1016/j.chaos.2016.05.012

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