A spectral estimation of tempered stable stochastic volatility models and option pricing

A characteristic function-based method is proposed to estimate the time-changed Lévy 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 performs better than the finite-activity one. By introducing a jump component in the volatility process, a double-jump model is also investigated.