Option pricing for GARCH-type models with generalized hyperbolic innovations

Christophe Chorro (), Dominique Guegan () and Florian Ielpo
Additional contact information
Christophe Chorro: Centre d'Economie de la Sorbonne, https://centredeconomiesorbonne.cnrs.fr
Dominique Guegan: Centre d'Economie de la Sorbonne - Paris School of Economics, https://cv.archives-ouvertes.fr/dominique-guegan

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

Abstract: In this paper, we provide a new dynamic asset pricing model for plain vanilla options and we discuss its ability to produce minimum mispricing errors on equity option books. Given the historical measure, the dynamics of assets are modeled by Garch-type models with generalized hyperbolic innovations and the pricing kernel is an exponential affine function of the state variables, we show that the risk neutral distribution is unique and implies again a generalized hyperbolic dynamics with changed parameters. We provide an empirical test for our pricing methodology on two data sets of options respectively written on the French CAC 40 and the American SP 500. Then, using our theoretical result associated with Monte Carlo simulations, we compare this approach to natural competitors in order to test its efficiency. More generally, our empirical investigations analyze the ability of specific parametric innovations to reproduce market prices in the context of an exponential affine specification of the stochastic discount factor

Keywords: Generalized hyperbolic distribution; option pricing; incomplete markets; CAC 40; SP 500; GARCH-type models (search for similar items in EconPapers)
JEL-codes: C22 G13 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2010-03
New Economics Papers: this item is included in nep-mic
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Citations: View citations in EconPapers (6)

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http://mse.univ-paris1.fr/pub/mse/CES2010/10023.pdf (application/pdf)

Related works:
Journal Article: Option pricing for GARCH-type models with generalized hyperbolic innovations (2012)
Working Paper: Option Pricing for GARCH-type Models with Generalized Hyperbolic Innovations (2012)
Working Paper: Option pricing for GARCH-type models with generalized hyperbolic innovations (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:mse:cesdoc:10023

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