Luca Vincenzo Ballestra, Enzo D'Innocenzo, Christian Tezza
arXiv 18 Oct 2024 · Econometrics · publishedJournal of Empirical Finance (2025) · 1 citations (OpenAlex)
arXiv:2410.14585 · PDF · DOI · OpenAlex · Extracted main text
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.
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The works this paper leans on most, across its whole bibliography — not restricted to papers in our corpus. Ranked by composite intensity, which combines how often a work is mentioned, how many sections mention it, and how much of that falls in the main text rather than the appendix.
| Reference | Intensity | Mentions | Sections | Main text | |
|---|---|---|---|---|---|
| 1 | S.L. Heston and S. Nandi (2000) A closed-form GARCH option valuation model | 1.000 | 9 | 5 | 100% |
| 2 | H. Ghanbari (2024) Persistent and transient variance components in option pricing models with variance-dependent kernel | 1.000 | 8 | 5 | 100% |
| 3 | P. Christoffersen, K. Jacobs, C. Ornthanalai, and Y. Wang (2008) Option valuation with long-run and short-run volatility components | 1.000 | 8 | 4 | 100% |
| 4 | P. Christoffersen, K. Jacobs, and C. Ornthanalai (2012) Dynamic jump intensities and risk premiums: Evidence from S&P500 returns and options | 1.000 | 7 | 4 | 100% |
| 5 | S.P. Meyn and R.L. Tweedie (1993) Markov Chains and Stochastic Stability | 0.794 | 8 | 2 | 75% |
| 6 | E. Nummelin (1984) General Irreducible Markov Chains and Non-Negative Operators | 0.737 | 4 | 2 | 75% |
| 7 | P. Christoffersen, K. Jacobs, and S.L. Heston (2009) The shape and term structure of the index option smirk: Why multifactor stochastic volatility models work so well | 0.737 | 3 | 2 | 100% |
| 8 | J.P. Fouque and M.J. Lorig (2011) A fast mean-reverting correction to Heston's stochastic volatility model | 0.644 | 2 | 2 | 100% |
| 9 | T. Adrian and J. Rosenberg (2008) Stock returns and volatility: Pricing the short-run and long-run components of market risk | 0.585 | 3 | 1 | 100% |
| 10 | D.B. Nelson (1990) ARCH models as diffusion approximations | 0.511 | 3 | 2 | 33% |
Showing the top 10 of 47 scored citations.