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Normal Modified Stable Processes

Author

Listed:
  • Neil Shephard
  • Ole E. Barndorff-Nielsen
  • University of Aarhus

Abstract

This paper discusses two classes of distributions, and stochastic processes derived from them: modified stable (MS) laws and normal modified stable (NMS) laws. This extends corresponding results for the generalised inverse Gaussian (GIG) and generalised hyperbolic (GH) or normal generalised inverse Gaussian (NGIG) laws. The wider framework thus established provides, in particular, for added flexibility in the modelling of the dynamics of financial time series, of importance especially as regards OU based stochastic volatility models for equities. In the special case of the tempered stable OU process an exact option pricing formula can be found, extending previous results based on the inverse Gaussian and gamma distributions.

Suggested Citation

  • Neil Shephard & Ole E. Barndorff-Nielsen & University of Aarhus, 2001. "Normal Modified Stable Processes," Economics Series Working Papers 72, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:72
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    References listed on IDEAS

    as
    1. Dilip B. Madan & Peter P. Carr & Eric C. Chang, 1998. "The Variance Gamma Process and Option Pricing," Review of Finance, European Finance Association, vol. 2(1), pages 79-105.
    2. Ghysels, E. & Harvey, A. & Renault, E., 1995. "Stochastic Volatility," Papers 95.400, Toulouse - GREMAQ.
    3. Ole E. Barndorff‐Nielsen & Neil Shephard, 2002. "Econometric analysis of realized volatility and its use in estimating stochastic volatility models," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 64(2), pages 253-280, May.
    4. Neil Shephard, 2005. "Stochastic Volatility," Economics Papers 2005-W17, Economics Group, Nuffield College, University of Oxford.
    5. Ole E. Barndorff-Nielsen & Neil Shephard, 2001. "Integrated OU Processes," Economics Papers 2001-W1, Economics Group, Nuffield College, University of Oxford.
    6. Ole E. Barndorff‐Nielsen & Neil Shephard, 2001. "Non‐Gaussian Ornstein–Uhlenbeck‐based models and some of their uses in financial economics," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 63(2), pages 167-241.
    7. Hull, John C & White, Alan D, 1987. "The Pricing of Options on Assets with Stochastic Volatilities," Journal of Finance, American Finance Association, vol. 42(2), pages 281-300, June.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    lévy process; inverse Gaussian; OU process; stable; stochastic volatility; subordination; tempered stable;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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