Option Pricing with Time-changed Lévy Processes

Sven Klingler, Young Shin Kim, Svetlozar T. Rachev, Frank J. Fabozzi

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Abstract

In this article, we introduce two new six-parameter processes based on time-changing tempered stable distributions and develop an option pricing model based on these processes. This model provides a good fit to observed option prices. To demonstrate the advantages of the new processes, we conduct two empirical studies to compare their performance to other processes that have been used in the literature.
Original languageEnglish
JournalApplied Financial Economics
Volume23
Issue number15
Pages (from-to)1231-1238
Number of pages8
ISSN0960-3107
DOIs
Publication statusPublished - 2013

Keywords

  • Option pricing
  • Stochastic volatility
  • Stochastic-time change
  • Levy processes
  • Tempered stable distributions

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