OPTION PRICING WITH VG-LIKE MODELS

We relax separately two assumptions regarding the Variance Gamma (VG) process and price options accordingly. In the case of the Difference of Gammas model we achieve a better fit to market data than achieved by other comparable models. In the case of the long range dependent VG model, we find that the current "skew-correcting" approach to pricing options has shortcomings, and identify a number of model characteristics (flexible skewness, dependence of squared returns, accommodation of the leverage effect) which appear to be important in achieving a good fit to market data.