Option pricing with time-changed Lévy processes

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

doi:10.1080/09603107.2013.807024

Option pricing with time-changed Lévy processes

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

Dean's Office, College of Business

Copenhagen Business School
Stony Brook University
EDHEC Business School

Research output: Contribution to journal › Article › peer-review

16 Scopus citations

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 language	English
Pages (from-to)	1231-1238
Number of pages	8
Journal	Applied Financial Economics
Volume	23
Issue number	15
DOIs	https://doi.org/10.1080/09603107.2013.807024
State	Published - Aug 2013

Keywords

Lévy processes
option pricing
stochastic volatility
stochastic-time change
tempered stable distributions

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10.1080/09603107.2013.807024

Cite this

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title = "Option pricing with time-changed L{\'e}vy processes",

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.",

keywords = "L{\'e}vy processes, option pricing, stochastic volatility, stochastic-time change, tempered stable distributions",

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AU - Kim, Young Shin

AU - Rachev, Svetlozar T.

AU - Fabozzi, Frank J.

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N2 - 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.

AB - 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.

KW - Lévy processes

KW - option pricing

KW - stochastic volatility

KW - stochastic-time change

KW - tempered stable distributions

UR - https://www.scopus.com/pages/publications/84880964591

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DO - 10.1080/09603107.2013.807024

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JO - Applied Financial Economics

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ER -

Option pricing with time-changed Lévy processes

Abstract

Keywords

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