Time for a Change: The Variance Gamma Model and Option Pricing

Abstract

The most widely used option pricing model is the Black-Scholes model. We motivate an alternative option pricing model called the Variance Gamma (VG) model and demonstrate its implementation in the Bloomberg system.

Keywords: Black-Scholes, variance gamma model, skew, kurtosis, volatility smile, option pricing, equity options, time changed Brownian motion

JEL Classification: G13