Results 1  10
of
400
Stochastic Volatility for Lévy Processes
, 2001
"... Three processes re°ecting persistence of volatility are initially formulated by evaluating three L¶evy processes at a time change given by the integral of a mean reverting square root process. The model for the mean reverting time change is then generalized to include NonGaussian models that are so ..."
Abstract

Cited by 212 (12 self)
 Add to MetaCart
Three processes re°ecting persistence of volatility are initially formulated by evaluating three L¶evy processes at a time change given by the integral of a mean reverting square root process. The model for the mean reverting time change is then generalized to include NonGaussian models that are solutions to OU (OrnsteinUhlenbeck) equations driven by one sided discontinuous L¶evy processes permitting correlation with the stock. Positive stock price processes are obtained by exponentiating and mean correcting these processes, or alternatively by stochastically exponentiating these processes. The characteristic functions for the log price can be used to yield option prices via the fast Fourier transform. In general, mean corrected exponentiation performs better than employing the stochastic exponential. It is observed that the mean corrected exponential model is not a martingale in the ¯ltration in which it is originally de¯ned. This leads us to formulate and investigate the important property of martingale marginals where we seek martingales in altered ¯ltrations consistent with the one dimensional marginal distributions of the level of the process at each future date. 1
TimeChanged Lévy Processes and Option Pricing
, 2002
"... As is well known, the classic BlackScholes option pricing model assumes that returns follow Brownian motion. It is widely recognized that return processes differ from this benchmark in at least three important ways. First, asset prices jump, leading to nonnormal return innovations. Second, return ..."
Abstract

Cited by 182 (21 self)
 Add to MetaCart
As is well known, the classic BlackScholes option pricing model assumes that returns follow Brownian motion. It is widely recognized that return processes differ from this benchmark in at least three important ways. First, asset prices jump, leading to nonnormal return innovations. Second, return volatilities vary stochastically over time. Third, returns and their volatilities are correlated, often negatively for equities. We propose that timechanged Lévy processes be used to simultaneously address these three facets of the underlying asset return process. We show that our framework encompasses almost all of the models proposed in the option pricing literature. Despite the generality of our approach, we show that it is straightforward to select and test a particular option pricing model through the use of characteristic function technology.
The Finite Moment Log Stable Process and Option Pricing
, 2002
"... We document a surprising pattern in market prices of S&P 500 index options. When implied volatilities are graphed against a standard measure of moneyness, the implied volatility smirk does not flatten out as maturity increases up to the observable horizon of two years. This behavior contrasts sh ..."
Abstract

Cited by 109 (12 self)
 Add to MetaCart
We document a surprising pattern in market prices of S&P 500 index options. When implied volatilities are graphed against a standard measure of moneyness, the implied volatility smirk does not flatten out as maturity increases up to the observable horizon of two years. This behavior contrasts sharply with the implications of many pricing models and with the asymptotic behavior implied by the central limit theorem (CLT). We develop a parsimonious model which deliberately violates the CLT assumptions and thus captures the observed behavior of the volatility smirk over the maturity horizon. Calibration exercises demonstrate its superior performance against several widely used alternatives.
Optimal stopping and perpetual options for Lévy processes
, 2000
"... Solution to the optimal stopping problem for a L'evy process and reward functions (e x \Gamma K) + and (K \Gamma e x ) + , discounted at a constant rate is given in terms of the distribution of the overall supremum and infimum of the process killed at this rate. Closed forms of this sol ..."
Abstract

Cited by 68 (7 self)
 Add to MetaCart
Solution to the optimal stopping problem for a L'evy process and reward functions (e x \Gamma K) + and (K \Gamma e x ) + , discounted at a constant rate is given in terms of the distribution of the overall supremum and infimum of the process killed at this rate. Closed forms of this solutions are obtained under the condition of positive jumps mixedexponentially distributed. Results are interpreted as admissible pricing of perpetual American call and put options on a stock driven by a L'evy process, and a BlackScholes type formula is obtained. Keywords and Phrases: Optimal stopping, L'evy process, mixtures of exponential distributions, American options, Derivative pricing. JEL Classification Number: G12 Mathematics Subject Classification (1991): 60G40, 60J30, 90A09. 1 Introduction and general results 1.1 L'evy processes Let X = fX t g t0 be a real valued stochastic process defined on a stochastic basis(\Omega ; F ; F = (F t ) t0 ; P ) that satisfy the usual conditions. A...
Stochastic Skew in Currency Options
 Journal of Financial Economics
, 2007
"... ours. We welcome comments, including references to related papers we have inadvertently overlooked. ..."
Abstract

Cited by 60 (5 self)
 Add to MetaCart
ours. We welcome comments, including references to related papers we have inadvertently overlooked.
Specification Analysis of Option Pricing Models Based on TimeChanged Lévy Processes
, 2003
"... We analyze the specifications of option pricing models based on timechanged Lévy processes. We classify option pricing models based on the structure of the jump component in the underlying return process, the source of stochastic volatility, and the specification of the volatility process itself. O ..."
Abstract

Cited by 59 (8 self)
 Add to MetaCart
We analyze the specifications of option pricing models based on timechanged Lévy processes. We classify option pricing models based on the structure of the jump component in the underlying return process, the source of stochastic volatility, and the specification of the volatility process itself. Our estimation of a variety of model specifications indicates that to better capture the behavior of the S&P 500 index options, we must incorporate a high frequency jump component in the return process and generate stochastic volatilities from two different sources, the jump component and the diffusion component.
Meixner Processes in Finance
, 2001
"... In the BlackScholes option price model Brownian motion and the underlying Normal distribution play a fundamental role. Empirical evidence however shows that the normal distribution is a very poor model to fit reallife data. In order to achieve a better fit we replace the Brownian motion by a speci ..."
Abstract

Cited by 57 (9 self)
 Add to MetaCart
(Show Context)
In the BlackScholes option price model Brownian motion and the underlying Normal distribution play a fundamental role. Empirical evidence however shows that the normal distribution is a very poor model to fit reallife data. In order to achieve a better fit we replace the Brownian motion by a special Levy process: the Meixner process. We show that the underlying Meixner distribution allows an almost perfect fit to the data by performing a number of statistical tests. We discuss properties of the driving Meixner process. Next, we give a valuation formula for derivative securities, state the analogue of the BlackScholes differential equation, and compare the obtained prices with the classical BlackScholes prices. Throughout the text the method is illustrated by the modeling of the Nikkei225 Index. Similar analysis for other indices are given in the appendix.
Stock Options and Credit Default Swaps: A Joint Framework for Valuation and Estimation
 JOURNAL OF FINANCIAL ECONOMETRICS, 2009, 1–41
, 2009
"... We propose a dynamically consistent framework that allows joint valuation and estimation of stock options and credit default swaps written on the same reference company. We model default as controlled by a Cox process with a stochastic arrival rate. When default occurs, the stock price drops to zero ..."
Abstract

Cited by 55 (8 self)
 Add to MetaCart
We propose a dynamically consistent framework that allows joint valuation and estimation of stock options and credit default swaps written on the same reference company. We model default as controlled by a Cox process with a stochastic arrival rate. When default occurs, the stock price drops to zero. Prior to default, the stock price follows a jumpdiffusion process with stochastic volatility. The instantaneous default rate and variance rate follow a bivariate continuous process, with its joint dynamics specified to capture the observed behavior of stock option prices and credit default swap spreads. Under this joint specification, we propose a tractable valuation methodology for stock options and credit default swaps. We estimate the joint risk dynamics using data from both markets for eight companies that span five sectors and six major credit rating classes from B to AAA. The estimation highlights the interaction between market risk (return variance) and credit risk (default arrival) in pricing stock options and credit default swaps.
A novel pricing method for European options based on Fouriercosine series expansions
 SIAM J. SCI. COMPUT
, 2008
"... Here we develop an option pricing method for European options based on the Fouriercosine series, and call it the COS method. The key insight is in the close relation of the characteristic function with the series coefficients of the Fouriercosine expansion of the density function. In most cases, ..."
Abstract

Cited by 55 (14 self)
 Add to MetaCart
(Show Context)
Here we develop an option pricing method for European options based on the Fouriercosine series, and call it the COS method. The key insight is in the close relation of the characteristic function with the series coefficients of the Fouriercosine expansion of the density function. In most cases, the convergence rate of the COS method is exponential and the computational complexity is linear. Its range of application covers different underlying dynamics, including Lévy processes and the Heston stochastic volatility model, and various types of option contracts. We will present the method and its applications in two separate parts. The first one is this paper, where we deal with European options in particular. In a followup paper we will present its application to options with earlyexercise features.