Title

RISK-NEUTRAL OPTION PRICING
UNDER GARCH INTENSITY MODEL

Authors

Kyungsub Lee
Department of Statistics
Yeungnam University
Gyeongsan, Gyeongbuk 38541, KOREA

Abstract

The risk-neutral option pricing method under GARCH intensity model is examined. The GARCH intensity model incorporates the characteristics of financial return series such as volatility clustering, leverage effect and conditional asymmetry. The GARCH intensity option pricing model has flexibility in changing the volatility according to the probability measure change. A generalized version of the GARCH intensity risk-neutral pricing method is also provided.

History

Received: March 27, 2017
Revised: May 4, 2017
Published: May 23, 2017

AMS Classification, Key Words

AMS Subject Classification: 91G20
Key Words and Phrases: GARCH model, intensity model, risk-neutral pricing, equivalent martingale measure

Download Section

Download paper from here.
You will need Adobe Acrobat reader. For more information and free download of the reader, see the Adobe Acrobat website.

Bibliography

1

BABSIRI, M. E., AND ZAKOIAN, J.-M.,
Contemporaneous asymmetry in GARCH processes,
Journal of Econometrics, 101, (2001), 257 - 294.

2

BAKSHI, G., AND MADAN, D.,
A theory of volatility spreads,
Management Science, 52, (2006), 1945-1956.

3

BLACK, F., AND SCHOLES, M. S.,
The pricing of options and corporate liabilities,
Journal of Political Economics, 81, (1973), 637-654.

4

BOLLERSLEV, T.,
Generalized autoregressive conditional heteroskedasticity,
Journal of Econometrics, 31, (1986), 307-327.

5

CHOE, G. H., AND LEE, K.,
Conditional correlation in asset return and garch intensity model,
AStA Advances in Statistical Analysis, 98, (2014), 197-224.

6

DUAN, J.-C.,
The GARCH option pricing model,
Mathematical Finance, 5, (1995), 13-32.

7

ELLIOTT, R. J., AND KOPP, P. E.,
Option pricing and hedge portfolios for poisson progresses,
Stochastic Analysis and Applications, 8, (1990), 157 - 167.

8

GLOSTEN, L. R., JAGANNATHAN, R., AND RUNKLE, D. E.,
On the relation between the expected value and the volatility of the nominal excess return on stocks,
Journal of Finance, 48, (1993), 1779-1801.

9

HARRISON, J. M., AND KREPS, D. M.,
Martingales and arbitrage in multiperiod securities markets,
Journal of Economic Theory, 20, (1979), 381-408.

10

HARRISON, J. M., AND PLISKA, S. R.,
Martingales and stochastic integrals in the theory of continuous trading,
Stochastic Processes and their Applications, 11, (1981), 215 - 260.

11

MERTON, R. C.,
Theory of rational option pricing,
The Bell Journal of economics and management science, 4, (1973), 141-183.

12

NELSON, D. B.,
Conditional heteroskedasticity in asset returns: a new approach,
Econometrica 59, (1991), 347-370.

13

PAGAN, A. R., AND SCHWERT, G. W.,
Alternative models for conditional stock volatility,
Journal of Econometrics, 45, (1990), 267-290.

14

ZAKOIAN, J.-M.,
Threshold heteroskedastic models,
Journal of Economic Dynamics and Control, 18, (1994), 931-995.

How to Cite?

DOI: 10.12732/ijpam.v114i3.17 How to cite this paper?

Source: International Journal of Pure and Applied Mathematics
ISSN printed version: 1311-8080
ISSN on-line version: 1314-3395
Year: 2017
Volume: 114
Issue: 3
Pages: 619 - 638

Google Scholar; DOI (International DOI Foundation); WorldCAT.

This work is licensed under the Creative Commons Attribution International License (CC BY).

---