Option Pricing in a Conditional Bilateral Gamma Model
17 Pages Posted: 28 Apr 2012
Date Written: April 26, 2012
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 (2000). We compare the calibration performance on SPX options with the models of Heston and Nandi (2000), Christoffersen, Heston and Jacobs (2006) and with a Dynamic Variance Gamma model introduced in Mercuri and Bellini (2011), obtaining promising results.
Keywords: bilateral gamma, garch, bilateral esscher transform, semianalytical pricing, SPX options
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