The shifted GARCH model with affine variance: Applications in pricing

Marcos Escobar-Anel, Yangyang Hou and Lars Stentoft
Authors registered in the RePEc Author Service: Marcos Escobar Anel ()

Finance Research Letters, 2025, vol. 71, issue C

Abstract: This paper introduces a modification to the affine GARCH model of Heston and Nandi (2000). The new model is designed to allow for a non-zero lower bound for the variance achieved by adding two parameters to the existing model. The affine structure of the moment-generating function is preserved at the level of variance, while an approximation is studied for log prices. The construction resembles the shifted continuous-time Heston (1993) model. Maximum likelihood estimation is performed on real data, and the model is shown to improve the fitting of the implied volatility surface, particularly for deep out-of-the-money options.

Keywords: Affine GARCH; Maximum likelihood estimation; Simulation; Option pricing; Moment generating function (search for similar items in EconPapers)
JEL-codes: C13 C51 C52 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:71:y:2025:i:c:s1544612324014004

DOI: 10.1016/j.frl.2024.106371

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