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

29 Pages Posted: 22 Apr 2008 Last revised: 13 Dec 2010

See all articles by Junye Li

Junye Li

Fudan University - School of Management

Carlo A. Favero

Bocconi University - Department of Economics; Bocconi University - Department of Finance; Centre for Economic Policy Research (CEPR)

Fulvio Ortu

Bocconi University - Department of Finance

Date Written: February 1, 2010

Abstract

This paper proposes a characteristic function-based method to estimate the time-changed Levy 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 infinite activity model in general performs better than the finite activity one. We also provide an extension to investigate the double-jump model by introducing a jump component in the volatility process.

Keywords: Empirical Characteristic Function, Stochastic Volatility, Infinite Activity Jumps, Volatility Jumps, Continuous GMM

JEL Classification: C13, C22, G10, G12, G13

Suggested Citation

Li, Junye and Favero, Carlo A. and Ortu, Fulvio, A Spectral Estimation of Tempered Stable Stochastic Volatility Models and Option Pricing (February 1, 2010). Available at SSRN: https://ssrn.com/abstract=1123505 or http://dx.doi.org/10.2139/ssrn.1123505

Junye Li (Contact Author)

Fudan University - School of Management ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

Carlo A. Favero

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

HOME PAGE: http://www.igier.unibocconi.it\favero

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Fulvio Ortu

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

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