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| Autori principali: | , , |
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| Natura: | Preprint |
| Pubblicazione: |
2024
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| Soggetti: | |
| Accesso online: | https://arxiv.org/abs/2410.14585 |
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| _version_ | 1866912076253888512 |
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| author | Ballestra, Luca Vincenzo D'Innocenzo, Enzo Tezza, Christian |
| author_facet | Ballestra, Luca Vincenzo D'Innocenzo, Enzo Tezza, Christian |
| contents | We introduce a novel GARCH model that integrates two sources of uncertainty to better capture the rich, multi-component dynamics often observed in the volatility of financial assets. This model provides a quasi closed-form representation of the characteristic function for future log-returns, from which semi-analytical formulas for option pricing can be derived. A theoretical analysis is conducted to establish sufficient conditions for strict stationarity and geometric ergodicity, while also obtaining the continuous-time diffusion limit of the model. Empirical evaluations, conducted both in-sample and out-of-sample using S\&P500 time series data, show that our model outperforms widely used single-factor models in predicting returns and option prices. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2410_14585 |
| institution | arXiv |
| publishDate | 2024 |
| record_format | arxiv |
| spellingShingle | A GARCH model with two volatility components and two driving factors Ballestra, Luca Vincenzo D'Innocenzo, Enzo Tezza, Christian Econometrics We introduce a novel GARCH model that integrates two sources of uncertainty to better capture the rich, multi-component dynamics often observed in the volatility of financial assets. This model provides a quasi closed-form representation of the characteristic function for future log-returns, from which semi-analytical formulas for option pricing can be derived. A theoretical analysis is conducted to establish sufficient conditions for strict stationarity and geometric ergodicity, while also obtaining the continuous-time diffusion limit of the model. Empirical evaluations, conducted both in-sample and out-of-sample using S\&P500 time series data, show that our model outperforms widely used single-factor models in predicting returns and option prices. |
| title | A GARCH model with two volatility components and two driving factors |
| topic | Econometrics |
| url | https://arxiv.org/abs/2410.14585 |