A modified stochastic volatility model based on Gamma Ornstein–Uhlenbeck process and option pricing

Yanhui Mi
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Yanhui Mi: Department of Statistics, Purdue University, 250 N, University Street, West Lafayette IN, 47907, USA

International Journal of Financial Engineering (IJFE), 2016, vol. 03, issue 02, 1-16

Abstract: Stochastic volatility model of the Gamma Ornstein–Uhlenbeck possess authentic capability of both capturing some stylized features of financial time series and pricing European options. In this work we modify the Gamma OU model from the viewpoint of Monte Carlo simulation, which is crucial in both model inference and exotic option pricing. We discuss topics related to the measure transformation between objective and risk-neutral measures, arbitrage-free and market incompleteness of the new model. Furthermore, we investigate the performance of this model in European options pricing and an empirical application is presented.

Keywords: Gamma Ornstein–Uhlenbeck processes; gamma-beta relationship; objective and risk-neutral measures; incomplete markets; option pricing; Monte Carlo (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1142/S2424786316500171

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