Additive normal tempered stable processes for equity derivatives and power-law scaling

DOI10.1080/14697688.2021.1983200MaRDI QIDQ5072909zbMATH OpenOpenAlexFDO

Authors Michele Azzone, Roberto Baviera

Publication date 5 May 2022

Published in Quantitative Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1909.07139

zbMATH Keywords

additive processcalibrationvolatility surface

Mathematics Subject Classification ID

Processes with independent increments; Lévy processes (60G51) Derivative securities (option pricing, hedging, etc.) (91G20)

Abstract: We introduce a simple model for equity index derivatives. The model generalizes well known L`evy Normal Tempered Stable processes (e.g. NIG and VG) with time dependent parameters. It accurately fits Equity index implied volatility surfaces in the whole time range of quoted instruments, including small time horizon (few days) and long time horizon options (years). We prove that the model is an Additive process that is constructed using an Additive subordinator. This allows us to use classical L`evy-type pricing techniques. We discuss the calibration issues in detail and we show that, in terms of mean squared error, calibration is on average two orders of magnitude better than both L`evy processes and Self-similar alternatives. We show that even if the model loses the classical stationarity property of L`evy processes, it presents interesting scaling properties for the calibrated parameters.

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Cited in

(6)

• A fast Monte Carlo scheme for additive processes and option pricing
• The economics of time as it is embedded in the prices of options§
• Short-time implied volatility of additive normal tempered stable processes
• The bilateral Gamma motion: calibration and option pricing
• Explicit option pricing with additive processes
• Risk minimization for markets driven by pure-jump additive processes via Malliavin-Mancino-Taylor type formula

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