A GARCH option pricing model with α-stable innovations

Christian Menn, Svetlozar T. Rachev

Research output: Contribution to journalArticlepeer-review

28 Scopus citations


We develop an option pricing model which is based on a GARCH asset return process with α-stable innovations with truncated tails. The approach utilizes a canonic martingale measure as pricing measure which provides the possibility of a model calibration to market prices. The GARCH-stable option pricing model allows the explanation of some well-known anomalies in empirical data as volatility clustering and heavy tailedness of the return distribution. Finally, the results of Monte Carlo simulations concerning the option price and the implied volatility with respect to different strike and maturity levels are presented.

Original languageEnglish
Pages (from-to)201-209
Number of pages9
JournalEuropean Journal of Operational Research
Issue number1
StatePublished - May 16 2005


  • GARCH processes
  • Option pricing
  • Stable distributions
  • Tail truncation
  • Volatility smile


Dive into the research topics of 'A GARCH option pricing model with α-stable innovations'. Together they form a unique fingerprint.

Cite this