 Volatility Bursts: A Discrete-Time Option Model with Multiple Volatility Components*Francesca Lilla Journal of Financial Econometrics, 2023, vol. 21, issue 3, 678-713 Abstract: I propose an affine discrete-time model, called Vector Autoregressive Gamma with volatility Bursts (VARG-B) in which volatility experiences, in addition to frequent and small changes, periods of sudden and extreme movements generated by a latent factor which evolves according to the Autoregressive Gamma Zero process. A key advantage of the discrete-time specification is the possibility of estimating the model using Kalman Filter techniques. Moreover, the VARG-B model leads to a fully analytic conditional Laplace transform which boils down to a closed-form option pricing formula. When estimated on S&P500 index options and returns, the new model provides more accurate option pricing and modeling of the IV surface compared with some alternative models. Keywords: ARG-zero; Kalman filter; option pricing; realized volatility; volatility bursts (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:oup:jfinec:v:21:y:2023:i:3:p:678-713. Ordering information: This journal article can be ordered from Access Statistics for this article Journal of Financial Econometrics is currently edited by Allan Timmermann and Fabio Trojani More articles in Journal of Financial Econometrics from Oxford University Press Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK. Contact information at EDIRC. |
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