Tempered stable processes with time-varying exponential tails

DOI10.1080/14697688.2021.1962958zbMATH Open1490.91214arXiv2006.07669OpenAlexW3200827920WikidataQ115549868 ScholiaQ115549868MaRDI QIDQ5072913FDOQ5072913

Authors:

Publication date: 5 May 2022

Published in: Quantitative Finance (Search for Journal in Brave)

Abstract: In this paper, we introduce a new time series model having a stochastic exponential tail. This model is constructed based on the Normal Tempered Stable distribution with a time-varying parameter. The model captures the stochastic exponential tail, which generates the volatility smile effect and volatility term structure in option pricing. Moreover, the model describes the time-varying volatility of volatility. We empirically show the stochastic skewness and stochastic kurtosis by applying the model to analyze S&P 500 index return data. We present the Monte-Carlo simulation technique for the parameter calibration of the model for the S&P 500 option prices. We can see that the stochastic exponential tail makes the model better to analyze the market option prices by the calibration.

Full work available at URL: https://arxiv.org/abs/2006.07669

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zbMATH Keywords

option pricingvolatility of volatilitynormal tempered stable distributionLévy processstochastic exponential tail

Mathematics Subject Classification ID

Processes with independent increments; Lévy processes (60G51) Derivative securities (option pricing, hedging, etc.) (91G20) Applications of statistics to actuarial sciences and financial mathematics (62P05)

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Cited In (6)

• Estimation for multivariate normal rapidly decreasing tempered stable distributions
• Approximating Multivariate Tempered Stable Processes
• Exponential stock models driven by tempered stable processes
• Portfolio optimization and marginal contribution to risk on multivariate normal tempered stable model
• Portfolio optimization with relative tail risk
• Additive normal tempered stable processes for equity derivatives and power-law scaling

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