OPTION PRICING WITH VG–LIKE MODELS

Richard Finlay and Eugene Seneta ()
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Eugene Seneta: School of Mathematics and Statistics, University of Sydney, F07 University of Sydney, NSW 2006, Australia

International Journal of Theoretical and Applied Finance (IJTAF), 2008, vol. 11, issue 08, 943-955

Abstract: We relax separately two assumptions regarding the Variance Gamma (VG) process and price options accordingly. In the case of the Difference of Gammas model we achieve a better fit to market data than achieved by other comparable models. In the case of the long range dependent VG model, we find that the current "skew-correcting" approach to pricing options has shortcomings, and identify a number of model characteristics (flexible skewness, dependence of squared returns, accommodation of the leverage effect) which appear to be important in achieving a good fit to market data.

Keywords: Variance Gamma process; difference of gamma processes; option pricing; long range dependence; static arbitrage (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (3)

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DOI: 10.1142/S0219024908005093

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