Tempered stable processes with time-varying exponential tails
In this paper, we introduce a new time series model with a stochastic exponential tail. This model is constructed based on the Normal Tempered Stable distribution with a time-varying parameter. It captures the stochastic exponential tail, which generates the volatility smile effect and volatility te...
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| Veröffentlicht in: | Quantitative finance 2022-03, Vol.22 (3), p.541-561 |
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| container_title | Quantitative finance |
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| creator | Kim, Young Shin Roh, Kum-Hwan Douady, Raphael |
| description | In this paper, we introduce a new time series model with a stochastic exponential tail. This model is constructed based on the Normal Tempered Stable distribution with a time-varying parameter. It 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 and empirically indicates stochastic skewness and stochastic kurtosis in the S&P 500 index return data. We present a Monte-Carlo simulation technique for parameter calibration of the model for S&P 500 option prices and show that a stochastic exponential tail improves the calibration performance. |
| doi_str_mv | 10.1080/14697688.2021.1962958 |
| format | Article |
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| ispartof | Quantitative finance, 2022-03, Vol.22 (3), p.541-561 |
| issn | 1469-7688 1469-7696 |
| language | eng |
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| source | Business Source Complete; Taylor & Francis:Master (3349 titles) |
| subjects | Applications Computational Finance General Finance Lévy process Normal tempered stable distribution Option pricing Portfolio Management Pricing of Securities Quantitative Finance Risk Management Securities prices Statistical Finance Statistics Stochastic exponential tail Volatility Volatility of volatility |
| title | Tempered stable processes with time-varying exponential tails |
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