A Spectral Estimation of Tempered Stable Stochastic Volatility Models and Option Pricing

Junye Lia, Carlo Favero () and Fulvio Ortu

No 370, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: A characteristic function-based method is proposed to estimate the time-changed L´evy models, which take into account both stochastic volatility and infinite-activity jumps. The method facilitates computation and overcomes problems related to the discretization error and to the non-tractable probability density. Estimation results and option pricing performance indicate that the infiniteactivity model performs better than the finite-activity one. By introducing a jump component in the volatility process, a double-jump model is also investigated.

Date: 2010
New Economics Papers: this item is included in nep-ecm and nep-ore
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Journal Article: A spectral estimation of tempered stable stochastic volatility models and option pricing (2012)
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