Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/194709 
Year of Publication: 
2017
Citation: 
[Journal:] Cogent Economics & Finance [ISSN:] 2332-2039 [Volume:] 5 [Issue:] 1 [Publisher:] Taylor & Francis [Place:] Abingdon [Year:] 2017 [Pages:] 1-16
Publisher: 
Taylor & Francis, Abingdon
Abstract: 
This article develops, a lattice-based approach for pricing contingent claims when parameters governing the logs of the underlying asset dynamics are modelled by generalized hyperbolic distribution and normal inverse Gaussian distribution. The pentanomial lattice is constructed using a moment matching procedure. Moment generating functions of generalized hyperbolic distribution and normal inverse Gaussian distribution are utilized to compute probabilities and jump parameters under historical measure P. Minimal entropy martingale measure (MEMM) is used to value European call option with a view of comparing the results with some of the existing benchmark model such as Black Scholes model. Empirical data from S&P500 index, RUTSELL2000 index and RUI1000 index are used to demonstrate how the model works. There is a significant difference especially for long term maturity (six months and above) type of contracts, the proposed model outperform the benchmark model, while performing poorly at short term contracts. Pentanomial NIG models seems to outperform the other models especially for long dated maturities.
Subjects: 
binomial
pentanomial lattice
generalized hyperbolic distribution
normal inverse Gaussian
minimal entropy martingale measure
European call option
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

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