A0423
Title: A flexible generalised hyperbolic option pricing model and special cases
Authors: Boris Choy - University of Sydney (Australia) [presenting]
Simon Kwok - University of Sydney (Australia)
Claudia Yeap - University of Sydney (Australia)
Abstract: A flexible generalised hyperbolic (GH) option pricing model is formulated, which has all four of its parameters free to be estimated. We also present six three-parameter special cases: a variance gamma (VG), $t$, hyperbolic, normal inverse Gaussian, reciprocal hyperbolic and normal reciprocal inverse Gaussian option pricing model. Using S\&P 500 Index options, we compare the flexible GH, VG, $t$ and Black-Scholes models. The flexible GH model offers the best out-of-sample pricing results and between the two three-parameter models, the $t$ model outperforms the VG model for both in-sample and out-of-sample pricing. All three models ameliorate the Black-Scholes model's implied volatility biases.
