Are Jumps in Time Changed Lévy Models Superfluous? An Empirical Investigation

30 Pages Posted: 12 Jun 2012

See all articles by Klaus Herrmann

Klaus Herrmann

KU Leuven - Department of Mathematics

Rainer Schoebel

University of Tuebingen - Faculty of Economics and Social Sciences

Date Written: June 11, 2012

Abstract

This paper provides empirical evidence that jumps in the underlying stock price process are superfluous for European option pricing in time changed Lévy models. We introduce a model with a.s. continuous sample paths and a parsimonious description in terms of free parameters. The conducted in- and out-of-sample analysis show almost no di fference concerning calibration quality to the German DAX index between the continuous model and pure jump alternatives. The jump models in fact show signs of over-parameterization displayed by dramatically varying parameter estimates over time. An analysis of the resulting fitting errors also reveals no benefi t from including jumps in the underlying process.

Keywords: option pricing, Lévy process, time change, model-to-market calibration, parameter stability

JEL Classification: G13

Suggested Citation

Herrmann, Klaus and Schoebel, Rainer, Are Jumps in Time Changed Lévy Models Superfluous? An Empirical Investigation (June 11, 2012). Available at SSRN: https://ssrn.com/abstract=2082302 or http://dx.doi.org/10.2139/ssrn.2082302

Klaus Herrmann

KU Leuven - Department of Mathematics ( email )

Celestijnenlaan 200 B
Leuven, B-3001
Belgium

Rainer Schoebel (Contact Author)

University of Tuebingen - Faculty of Economics and Social Sciences ( email )

Mohlstrasse 36
D-72074 Tuebingen
Germany
+49 7071 2977088 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
81
Abstract Views
526
rank
302,922
PlumX Metrics