Article2008

OPTION PRICING WITH VG–LIKE MODELS

29 citations0/0 files storedInternational Journal of Theoretical and Applied Finance

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Stochastic processes and financial applications Financial Markets and Investment Strategies Financial Risk and Volatility Modeling

Abstract

We relax separately two assumptions regarding the Variance Gamma (VG) process and price options accordingly. In the case of the Difference of Gammas model we achieve a better fit to market data than achieved by other comparable models. In the case of the long range dependent VG model, we find that the current "skew-correcting" approach to pricing options has shortcomings, and identify a number of model characteristics (flexible skewness, dependence of squared returns, accommodation of the leverage effect) which appear to be important in achieving a good fit to market data.

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References

1993A long memory property of stock market returns and a new model 1999Option valuation using the fast Fourier transform 1998The Variance Gamma Process and Option Pricing 1996Statistics for Long-Memory Processes.1990The Variance Gamma (V.G.) Model for Share Market Returns 2003Stochastic Volatility for Lévy Processes 2003Lévy Processes in Finance 1987Modelling Financial Time Series.

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