Generalized Autoregressive Gamma Processes

Bruno Feunou

Staff Working Papers from Bank of Canada

Abstract: We introduce generalized autoregressive gamma (GARG) processes, a class of autoregressive and moving-average processes that extends the class of existing autoregressive gamma (ARG) processes in one important dimension: each conditional moment dynamic is driven by a different and identifiable moving average of the variable of interest. The paper provides ergodicity conditions for GARG processes and derives closed-form conditional and unconditional moments. The paper also presents estimation and inference methods, illustrated by an application to European option pricing where the daily realized variance follows a GARG dynamic. Our results show that using GARG processes reduces pricing errors by substantially more than using ARG processes does.

Keywords: Econometric and statistical methods; Asset pricing (search for similar items in EconPapers)
JEL-codes: C58 G12 (search for similar items in EconPapers)
Pages: 80 pages
Date: 2023-08
New Economics Papers: this item is included in nep-ecm and nep-ets
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:23-40

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