 Tempered stable and tempered infinitely divisible GARCH modelsYoung Shin Kim, Svetlozar T. Rachev, Michele Leonardo Bianchi and Frank Fabozzi () Journal of Banking & Finance, 2010, vol. 34, issue 9, 2096-2109 Abstract: In this paper, we introduce a new GARCH model with an infinitely divisible distributed innovation. This model, which we refer to as the rapidly decreasing tempered stable (RDTS) GARCH model, takes into account empirical facts that have been observed for stock and index returns, such as volatility clustering, non-zero skewness, and excess kurtosis for the residual distribution. We review the classical tempered stable (CTS) GARCH model, which has similar statistical properties. By considering a proper density transformation between infinitely divisible random variables, we can find the risk-neutral price process, thereby allowing application to option-pricing. We propose algorithms to generate scenarios based on GARCH models with CTS and RDTS innovations. To investigate the performance of these GARCH models, we report parameter estimates for the Dow Jones Industrial Average index and stocks included in this index. To demonstrate the advantages of the proposed model, we calculate option prices based on the index. Keywords: Tempered; infinitely; divisible; distribution; Tempered; stable; distribution; Rapidly; decreasing; tempered; stable; distribution; GARCH; model; option-pricing (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:34:y:2010:i:9:p:2096-2109 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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