Modified GARCH Process and Variance Risk Premium

Jiang, Yushuang

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Modified GARCH Process and Variance Risk Premium

Jiang, Yushuang

Cite this item: Jiang, Y. (2014). Modified GARCH Process and Variance Risk Premium (Thesis, Master of Business). University of Otago. Retrieved from http://hdl.handle.net/10523/5079

Permanent link to OUR Archive version: http://hdl.handle.net/10523/5079

Date: 2014

Advisor: Zhang, Jin

Degree Name: Master of Business

Degree Discipline: Department of Accountancy & Finance

Publisher: University of Otago

Keywords: GARCH option pricing models

Research Type: Thesis

Languages: English

Abstract:

In this study, we modify the classical generalized autoregressive conditional heteroskedastic (GARCH) process by introducing a new uncertainty into the volatility process. We then change probability measures from physical to risk-neutral ones by extending Duan’s (1995) locally risk-neutral valuation relationship (LRNVR). With the information of both daily index returns and the Chicago Board Options Exchange (CBOE) Volatility Index (VIX), we estimate daily variances and model parameters by using the maximum likelihood method. The new modified GARCH process solves the problem of variance risk premium in the GARCH option models completely.

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Modified GARCH Process and Variance Risk Premium

Modified GARCH Process and Variance Risk Premium

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