Option Pricing in a Conditional Bilateral Gamma Model

17 Pages Posted: 28 Apr 2012

See all articles by Fabio Bellini

Fabio Bellini

University of Milano Bicocca - Dipartimento di Statistica e Metodi Quantitativi

Lorenzo Mercuri

University of Milan

Date Written: April 26, 2012

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 (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

Suggested Citation

Bellini, Fabio and Mercuri, Lorenzo, Option Pricing in a Conditional Bilateral Gamma Model (April 26, 2012). Available at SSRN: https://ssrn.com/abstract=2046478 or http://dx.doi.org/10.2139/ssrn.2046478

Fabio Bellini

University of Milano Bicocca - Dipartimento di Statistica e Metodi Quantitativi ( email )

Milano, Milan
Italy

Lorenzo Mercuri (Contact Author)

University of Milan ( email )

Via Festa del Perdono, 7
Milan, 20122
Italy

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