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A Lévy process for the GNIG probability law with 2nd order stochastic volatility and applications to option pricing
[journal article]
Abstract Here we derive the Lévy characteristic triplet for the GNIG
probability law. This characterizes the corresponding Lévy
process. In addition we derive equivalent martingale measures with
which to price simple put and call options. This is done under two
different equivalent martingale measures. We a... view more
Here we derive the Lévy characteristic triplet for the GNIG
probability law. This characterizes the corresponding Lévy
process. In addition we derive equivalent martingale measures with
which to price simple put and call options. This is done under two
different equivalent martingale measures. We also present a
multivariate Lévy process where the marginal probability
distribution follows a GNIG Lévy process. The main contribution
is, however, a stochastic process which is characterized by
autocorrelation in moments equal and higher than two, here a
multivariate specification is provided as well. The main tool for
achieving this is to add an integrated Feller square root process to
the dynamics of the second moment in a time-deformed Browninan
motion. Applications to option pricing are also considered, and a
brief discussion is held on the topic of estimation of the suggested
process.... view less
Classification
Economic Statistics, Econometrics, Business Informatics
Political Economy
Method
theory application
Free Keywords
Lévy process; Stochastic volatility; Derivative pricing; Multivariate Lévy process
Document language
English
Publication Year
2010
Page/Pages
p. 75-90
Journal
Quantitative Finance, 10 (2010) 1
DOI
https://doi.org/10.1080/14697680902849353
Status
Postprint; peer reviewed
Licence
PEER Licence Agreement (applicable only to documents from PEER project)