We propose a conditional Bilateral Gamma model, in which the shape parameters of the Bilateral Gamma distribution have a Garch-like dynamics. After risk neutralization by means of a Bilateral Esscher transform, the model admits a recursive procedure for the computation of the characteristic function of the underlying at maturity, à la Heston and Nandi (Rev Financ Stud 13(3):562-585, 2000). We compare the calibration performance on SPX options with the models of Heston and Nandi (Rev Financ Stud 13(3):562-585, 2000), Christoffersen et al. (J Econom 131(1-2):253-284, 2006) and with a dynamic variance Gamma model introduced in Mercuri and Bellini (J Financ Decis Mak 7(1):37-51, 2011), obtaining promising results. © 2013 Springer-Verlag Berlin Heidelberg.
Bellini, F., Mercuri, L. (2014). Option pricing in a conditional Bilateral Gamma model. CENTRAL EUROPEAN JOURNAL OF OPERATIONS RESEARCH, 22(2), 373-390 [10.1007/s10100-013-0286-7].
Option pricing in a conditional Bilateral Gamma model
BELLINI, FABIO;
2014
Abstract
We propose a conditional Bilateral Gamma model, in which the shape parameters of the Bilateral Gamma distribution have a Garch-like dynamics. After risk neutralization by means of a Bilateral Esscher transform, the model admits a recursive procedure for the computation of the characteristic function of the underlying at maturity, à la Heston and Nandi (Rev Financ Stud 13(3):562-585, 2000). We compare the calibration performance on SPX options with the models of Heston and Nandi (Rev Financ Stud 13(3):562-585, 2000), Christoffersen et al. (J Econom 131(1-2):253-284, 2006) and with a dynamic variance Gamma model introduced in Mercuri and Bellini (J Financ Decis Mak 7(1):37-51, 2011), obtaining promising results. © 2013 Springer-Verlag Berlin Heidelberg.
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