Option pricing in a Garch model with tempered stable innovations

Lorenzo Mercuri ()

Finance Research Letters, 2008, vol. 5, issue 3, 172-182

Abstract: The key problem for option pricing in Garch models is that the risk-neutral distribution of the underlying at maturity is unknown. Heston and Nandi solved this problem by computing the characteristic function of the underlying by a recursive procedure. Following the same idea, Christoffersen, Heston and Jacobs proposed a Garch-like model with inverse Gaussian innovations and recently Bellini and Mercuri obtained a similar procedure in a model with Gamma innovations. We present a model with tempered stable innovations that encompasses both the CHJ and the BM models as special cases. The proposed model is calibrated on S&P500 closing option prices and its performance is compared with the CHJ, the BM and the Heston-Nandi models.

Keywords: Option; pricing; Garch; Tempered; stable; distribution; Semi-analytical; valuation; Esscher; transform (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (19)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:5:y:2008:i:3:p:172-182

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