Option Pricing under GARCH models with Generalized Hyperbolic innovations (I): Methodology

Christophe Chorro (), Dominique Guegan () and Florian Ielpo
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Christophe Chorro: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique
Dominique Guegan: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement

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Abstract: In this paper, we present an alternative to the Black Scholes model for a discrete time economy using GARCH-type models for the underlying asset returns with Generalized Hyperbolic (GH) innovations that are potentially skewed and leptokurtic. Assuming that the stochastic discount factor is an exponential affine function of the states variables, we show that this class of distributions is stable under the Risk neutral change of probability.

Keywords: GARCH; Generalized Hyperbolic Distribution; pricing; risk neutral distribution.; risk neutral distribution; Distribution hyperbolique généralisée; risque neutre. (search for similar items in EconPapers)
Date: 2008-05
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00281585v1
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Citations: View citations in EconPapers (4)

Published in 2008

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Working Paper: Option pricing under GARCH models with generalized hyperbolic innovations (I): methodology (2008)
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