Zhu, Ke and Ling, Shiqing (2014): Modelbased pricing for financial derivatives.

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Abstract
Assume that S_{t} is a stock price process and Bt is a bond price process with a constant continuously compounded riskfree interest rate, where both are defined on an appropriate probability space P. Let y_{t} = log(S_{t}/S_{t1}). y_{t} can be generally decomposed into a conditional mean plus a noise with volatility components, but the discounted St is not a martingale under P. Under a general framework, we obtain a riskneutralized measure Q under which the discounted St is a martingale in this paper. Using this measure, we show how to derive the risk neutralized price for the derivatives. Special examples, such as NGARCH, EGARCH and GJR pricing models, are given. Simulation study reveals that these pricing models can capture the "volatility skew" of implied volatilities in the European option. A small application highlights the importance of our modelbased pricing procedure.
Item Type:  MPRA Paper 

Original Title:  Modelbased pricing for financial derivatives 
Language:  English 
Keywords:  NGARCH, EGARCH and GJR models; Nonnormal innovation; Option valuation; Risk neutralized measure; Volatility skew. 
Subjects:  C  Mathematical and Quantitative Methods > C1  Econometric and Statistical Methods and Methodology: General C  Mathematical and Quantitative Methods > C1  Econometric and Statistical Methods and Methodology: General > C10  General 
Item ID:  56623 
Depositing User:  Dr. Ke Zhu 
Date Deposited:  17 Jun 2014 00:57 
Last Modified:  27 Sep 2019 14:14 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/56623 