A Spectral Estimation of Tempered Stable Stochastic Volatility Models and Option Pricing

This paper proposes a characteristic function-based method to estimate the time-changed Levy models, which take into account both stochastic volatility and infinite activity jumps. The method facilitates computation and overcomes problems related to the discretization error and to the non-tractable probability density. Estimation results and option pricing performance indicate that the infinite activity model in general performs better than the finite activity one. We also provide an extension to investigate the double-jump model by introducing a jump component in the volatility process