Option pricing in a conditional Bilateral Gamma model

Fabio Bellini () and Lorenzo Mercuri ()

Central European Journal of Operations Research, 2014, vol. 22, issue 2, 373-390

Abstract: We propose a conditional Bilateral Gamma model, in which the shape parameters of the Bilateral Gamma distribution have a Garch-like dynamics. After risk neutralization by means of a Bilateral Esscher transform, the model admits a recursive procedure for the computation of the characteristic function of the underlying at maturity, à la Heston and Nandi (Rev Financ Stud 13(3):562–585, 2000 ). We compare the calibration performance on SPX options with the models of Heston and Nandi (Rev Financ Stud 13(3):562–585, 2000 ), Christoffersen et al. (J Econom 131(1–2):253–284, 2006 ) and with a dynamic variance Gamma model introduced in Mercuri and Bellini (J Financ Decis Mak 7(1):37–51, 2011 ), obtaining promising results. Copyright Springer-Verlag Berlin Heidelberg 2014

Keywords: Bilateral Gamma; Garch; Bilateral Esscher transform; Semianalytical pricing; SPX options (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1007/s10100-013-0286-7

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