Abstract
This paper introduces a modification to the affine GARCH model of Heston and Nandi (2000). The new model is designed to allow for a non-zero lower bound for the variance achieved by adding two parameters to the existing model. The affine structure of the moment-generating function is preserved at the level of variance, while an approximation is studied for log prices. The construction resembles the shifted continuous-time Heston (1993) model. Maximum likelihood estimation is performed on real data, and the model is shown to improve the fitting of the implied volatility surface, particularly for deep out-of-the-money options.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
