A comparison of pricing kernels for GARCH option pricing with generalized hyperbolic distributions

Alexandru Badescu; Robert J. Elliott; Reg Kulperger; Jarkko Miettinen; Tak Kuen Siu

doi:10.1142/S0219024911006401

A comparison of pricing kernels for GARCH option pricing with generalized hyperbolic distributions

Alexandru Badescu^*, Robert J. Elliott, Reg Kulperger, Jarkko Miettinen, Tak Kuen Siu

^*Corresponding author for this work

Department of Applied Finance

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

14 Citations (Scopus)

Abstract

Under discrete-time GARCH models markets are incomplete so there is more than one price kernel for valuing contingent claims. This motivates the quest for selecting an appropriate price kernel. Different methods have been proposed for the choice of a price kernel. Some of them can be justified by economic equilibrium arguments. This paper studies risk-neutral dynamics of various classes of Generalized Hyperbolic GARCH models arising from different price kernels. We discuss the properties of these dynamics and show that for some special cases, some pricing kernels considered here lead to similar risk neutral GARCH dynamics. Real data examples for pricing European options on the S&P 500 index emphasize the importance of the choice of a price kernel.

Original language	English
Pages (from-to)	669-708
Number of pages	40
Journal	International Journal of Theoretical and Applied Finance
Volume	14
Issue number	5
DOIs	https://doi.org/10.1142/S0219024911006401
Publication status	Published - Aug 2011

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A comparison of pricing kernels for GARCH option pricing with generalized hyperbolic distributions

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