Option Pricing for TGARCH-M with GED Based on Improved EEMD

ABSTRACT

Although option pricing plays an important role in risk management and investments, accurately pricing options remains challenging because of the increasingly complicated fluctuations in asset price processes. This article proposes a new option pricing model, the threshold GARCH with generalized error distribution (TGARCH-M with GED), based on an improved EEMD. By considering three key factors in the option pricing framework: different frequency risks, information asymmetry and non-normality, we show this novel model can capture more volatility features. Furthermore, the empirical results indicate we obtain better parameter estimation results and fewer pricing errors through comparative analysis. Our research provides meaningful guidance and new insights in the fields of risk management and investment.

KEY WORDS:

• Generalized error distribution (GED)
• improved ensemble empirical mode decomposition (EEMD)
• option pricing
• TGARCH-M process

Acknowledgments

We are very grateful to the editors and anonymous reviewers for their helpful comments and suggestions, which greatly improved the earlier draft.

Additional information

Funding

This work was supported by Jilin University Research funding under Grant number [2015QY020] (Project name: Designing Over the Counter Option of Agricultural Products and Risk Management—Based on the Perspective of Market Makers).