Time Changes, Lévy Jumps and Asset Returns
57 Pages Posted: 12 Feb 2019
Date Written: January 25, 2019
We provide an extensive time series and option pricing analysis of a novel class of time-changed Lévy models. To operationalize the models, we develop a simple and rigorous filtering procedure. Absence of arbitrage turns out to require a drift condition not appeared in the literature. An empirical analysis of 16 time-changed Lévy models shows that infinite activity processes carry significant risk premia and largely outperform many finite activity processes.
Keywords: Lévy jumps, time changes, tempered stable law, time series, option pricing
JEL Classification: C5, G12
Suggested Citation: Suggested Citation