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WROCŁAW UNIVERSITY
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TECHNOLOGY

Contents of PMS, Vol. 29, Fasc. 1,
pages 91 - 117
 

THE MODIFIED TEMPERED STABLE DISTRIBUTION, GARCH MODELS AND OPTION PRICING

Young Shin Kim
Svetlozar T. Rachev
Dong  Myung Chung
Michele  Leonardo Bianchi

Abstract: We introduce a new variant of the tempered stable distribution, named the modified tempered stable (MTS) distribution and we develop a GARCH option pricing model with MTS innovations. This model allows the description of some stylized empirical facts observed in financial markets, such as volatility clustering, skewness, and heavy tails of stock returns. To demonstrate the advantages of the MTS-GARCH model, we present the results of the parameter estimation.

2000 AMS Mathematics Subject Classification: 60E07, 91B84.

Keywords and phrases: Option pricing, GARCH process, temper- ed stable distribution, volatility clustering.

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