TY - JOUR
T1 - A note on the Wang transform for stochastic volatility pricing models
AU - Badescu, Alexandru
AU - Cui, Zhenyu
AU - Ortega, Juan Pablo
N1 - Publisher Copyright:
© 2016
PY - 2016/11/1
Y1 - 2016/11/1
N2 - In this paper we study a conditional version of the Wang transform in the context of discrete GARCH models and their diffusion limits. Our first contribution shows that the conditional Wang transform and Duans generalized local risk-neutral valuation relationship based on equilibrium considerations, lead to the same GARCH option pricing model. We derive the weak limit of an asymmetric GARCH model risk-neutralized via Wang's transform. The connection with stochastic volatility limits constructed using other standard pricing kernels, such as the conditional Esscher transform or the extended Girsanov principle, is further investigated by comparing the corresponding market prices of variance risk.
AB - In this paper we study a conditional version of the Wang transform in the context of discrete GARCH models and their diffusion limits. Our first contribution shows that the conditional Wang transform and Duans generalized local risk-neutral valuation relationship based on equilibrium considerations, lead to the same GARCH option pricing model. We derive the weak limit of an asymmetric GARCH model risk-neutralized via Wang's transform. The connection with stochastic volatility limits constructed using other standard pricing kernels, such as the conditional Esscher transform or the extended Girsanov principle, is further investigated by comparing the corresponding market prices of variance risk.
KW - Distortion function
KW - GARCH models
KW - Generalized local risk-neutral valuation relationship
KW - Stochastic discount factor
KW - Stochastic volatility
KW - Weak convergence
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U2 - 10.1016/j.frl.2016.07.011
DO - 10.1016/j.frl.2016.07.011
M3 - Article
AN - SCOPUS:84979752339
SN - 1544-6123
VL - 19
SP - 189
EP - 196
JO - Finance Research Letters
JF - Finance Research Letters
ER -