Browsing by Author "LI, SHENG"

Now showing 1 - 1 of 1
  • Thumbnail Image
    ItemOpen Access
    Risk neutral measures and GARCH model calibration
    (2012-09-24) LI, SHENG; Badescu, Alexandru
    Empirical studies have shown that GARCH models can be successfully used to describe option prices. Pricing such option contracts requires the risk neutral return dynamics of underlying asset. Since under the GARCH framework the market is incomplete, there is more than one risk neutral measure. In this thesis, we study the locally risk neutral valuation relationship, the mean correcting martingale measure, the conditional Esscher transform and the second order Esscher transform as martingale measure candidates. All these methods lead to the respective risk neutral return dynamics. We empirically examine in-sample and out-ofsample performance of Gaussian-TGARCH and Normal inverse Gaussian (NIG)-TGARCH models under these risk neutral measures.