Non-linear volatility with normal inverse Gaussian innovations: ad-hoc analytic option pricing

Sharif Mozumder (), Bakhtear Talukdar (), M. Humayun Kabir () and Bingxin Li ()
Additional contact information
Sharif Mozumder: University of Dhaka
Bakhtear Talukdar: Department of Finance and Business Law, University of Wisconsin-Whitewater
M. Humayun Kabir: Massey University Business School
Bingxin Li: West Virginia University

Review of Quantitative Finance and Accounting, 2024, vol. 62, issue 1, No 4, 97-133

Abstract: Abstract This paper proposes an approximate closed-form option-pricing model based on a non-linear GARCH process with Normal Inverse Gaussian (NIG) Lévy innovations. We develop the mathematical framework and demonstrate how to obtain a closed-form solution to the option price when the return dynamics are characterized by NIG innovations for volatility that follow a non-linear GARCH process. Using a sample of S&P 500 index options, we calibrate the proposed model alongside popular existing models. Overall, from a unified comparison of various analytic pricing approaches, we find that our model performs significantly better than existing models, both in-sample and out-of-sample.

Keywords: Lévy innovations; Stochastic volatility; GARCH; Calibration; NIG (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://link.springer.com/10.1007/s11156-023-01195-8 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:rqfnac:v:62:y:2024:i:1:d:10.1007_s11156-023-01195-8

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/11156/PS2

DOI: 10.1007/s11156-023-01195-8

Access Statistics for this article

Review of Quantitative Finance and Accounting is currently edited by Cheng-Few Lee

More articles in Review of Quantitative Finance and Accounting from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().