Option calibration of exponential Lévy models: Implementation and empirical results

Jakob Söhl and Mathias Trabs

No 2012-017, SFB 649 Discussion Papers from Humboldt University Berlin, Collaborative Research Center 649: Economic Risk

Abstract: Observing prices of European put and call options, we calibrate exponential Lévy models nonparametrically. We discuss the implementation of the spectral estimation procedures for Lévy models of finite jump activity as well as for self-decomposable Lévy models and improve these methods. Confidence intervals are constructed for the estimators in the finite activity case. They allow inference on the behavior of the parameters when the option prices are observed in a sequence of trading days. We compare the performance of the procedures for finite and infinite jump activity based on real option data.

Keywords: European option; jump diffusion; self-decomposability; confidence sets; nonlinear inverse problem; spectral cut-off (search for similar items in EconPapers)
JEL-codes: C14 G13 (search for similar items in EconPapers)
Date: 2012
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