Results 1  10
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211
Option Pricing by Transform Methods: Extensions, Unification, and Error Control
 Journal of Computational Finance
"... We extend and unify Fourieranalytic methods for pricing a wide class of options on any underlying state variable whose characteristic function is known. In this general setting, we bound the numerical pricing error of discretized transform computations, such as DFT/FFT. These bounds enable algorith ..."
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Cited by 89 (6 self)
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We extend and unify Fourieranalytic methods for pricing a wide class of options on any underlying state variable whose characteristic function is known. In this general setting, we bound the numerical pricing error of discretized transform computations, such as DFT/FFT. These bounds enable algorithms to select efficient quadrature parameters and to price with guaranteed numerical accuracy.
Stochastic volatility with leverage: fast likelihood inference
 Journal of Econometrics
, 2007
"... Kim, Shephard, and Chib (1998) provided a Bayesian analysis of stochastic volatility models based on a fast and reliable Markov chain Monte Carlo (MCMC) algorithm. Their method ruled out the leverage effect, which is known to be important in applications. Despite this, their basic method has been ex ..."
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Cited by 67 (19 self)
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Kim, Shephard, and Chib (1998) provided a Bayesian analysis of stochastic volatility models based on a fast and reliable Markov chain Monte Carlo (MCMC) algorithm. Their method ruled out the leverage effect, which is known to be important in applications. Despite this, their basic method has been extensively used in the financial economics literature and more recently in macroeconometrics. In this paper we show how the basic approach can be extended in a novel way to stochastic volatility models with leverage without altering the essence of the original approach. Several illustrative examples are provided.
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 ..."
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Cited by 59 (8 self)
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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.
Variation, jumps, market frictions and high frequency data in financial econometrics
, 2005
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Noarbitrage semimartingale restrictions for continuoustime volatility models subject to leveral effects, jumps and i.i.d. noise: Theory and testable distributional implications
 JOURNAL OF ECONOMETRICS
, 2007
"... We develop a sequential procedure to test the adequacy of jumpdiffusion models for return distributions. We rely on intraday data and nonparametric volatility measures, along with a new jump detection technique and appropriate conditional moment tests, for assessing the import of jumps and levera ..."
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Cited by 54 (9 self)
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We develop a sequential procedure to test the adequacy of jumpdiffusion models for return distributions. We rely on intraday data and nonparametric volatility measures, along with a new jump detection technique and appropriate conditional moment tests, for assessing the import of jumps and leverage effects. A novel robusttojumps approach is utilized to alleviate microstructure frictions for realized volatility estimation. Size and power of the procedure are explored through Monte Carlo methods. Our empirical findings support the jumpdiffusive representation for S&P500 futures returns but reveal
Pricing American Options Under Variance
 Gamma, J. Comp. Finance
"... We derive a form of the partial integrodifferential equation (PIDE) for pricing American options under variance gamma (VG) process. We then develop a numerical algorithm to solve for values of American options under variance gamma model. In this study, we compare the exercise boundary and early exe ..."
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Cited by 48 (2 self)
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We derive a form of the partial integrodifferential equation (PIDE) for pricing American options under variance gamma (VG) process. We then develop a numerical algorithm to solve for values of American options under variance gamma model. In this study, we compare the exercise boundary and early exercise premia between geometric VG law and geometric Brownian motion (GBM). We find that GBM premia are understated and hence we conclude that further work is necessary in developing fast efficient algorithms for solving PIDE’s with a view to calibrating stochastic processes to a surface of American option prices. 1
Maximum likelihood estimation of latent affine processes, Working paper
 Processes, forthcoming, Review of Financial Studies
, 2006
"... This article develops a direct filtrationbased maximum likelihood methodology for estimating the parameters and realizations of latent affine processes. Filtration is conducted in the transform space of characteristic functions, using a version of Bayes ’ rule for recursively updating the joint cha ..."
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Cited by 47 (2 self)
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This article develops a direct filtrationbased maximum likelihood methodology for estimating the parameters and realizations of latent affine processes. Filtration is conducted in the transform space of characteristic functions, using a version of Bayes ’ rule for recursively updating the joint characteristic function of latent variables and the data conditional upon past data. An application to daily stock market returns over 195396 reveals substantial divergences from EMMbased estimates; in particular, more substantial and timevarying jump risk. The implications for pricing stock index options are examined. 3 “The Lion in Affrik and the Bear in Sarmatia are Fierce, but Translated into a Contrary Heaven, are of less Strength and Courage.” Jacob Ziegler; translated by Richard Eden (1555) While models proposing timevarying volatility of asset returns have been around for thirty years, it has proven extraordinarily difficult to estimate the parameters of the underlying volatility process,
Meromorphic Lévy processes and their fluctuation identities
 Annals of Applied Probability
, 2011
"... The last couple of years has seen a remarkable number of new, explicit examples of the Wiener–Hopf factorization for Lévy processes where previously there had been very few. We mention, in particular, the many cases of spectrally negative Lévy processes in [Sixth Seminar on Stochastic Analysis, ..."
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Cited by 38 (10 self)
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The last couple of years has seen a remarkable number of new, explicit examples of the Wiener–Hopf factorization for Lévy processes where previously there had been very few. We mention, in particular, the many cases of spectrally negative Lévy processes in [Sixth Seminar on Stochastic Analysis,
Analysis of Fourier transform valuation formulas and applications
 Applied Mathematical Finance
"... Abstract. The aim of this article is to provide a systematic analysis of the conditions such that Fourier transform valuation formulas are valid in a general framework; i.e. when the option has an arbitrary payoff function and depends on the path of the asset price process. An interplay between the ..."
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Cited by 35 (9 self)
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Abstract. The aim of this article is to provide a systematic analysis of the conditions such that Fourier transform valuation formulas are valid in a general framework; i.e. when the option has an arbitrary payoff function and depends on the path of the asset price process. An interplay between the conditions on the payoff function and the process arises naturally. We also extend these results to the multidimensional case, and discuss the calculation of Greeks by Fourier transform methods. As an application, we price options on the minimum of two assets in Lévy and stochastic volatility models.
Hölder continuity of solutions of secondorder nonlinear elliptic integrodifferential equations
 J. Eur. Math. Soc. (JEMS
"... Abstract. This paper is concerned with Hölder regularity of viscosity solutions of secondorder, fully nonlinear elliptic integrodifferential equations. Our results rely on two key ingredients: first we assume that, at each point of the domain, either the equation is strictly elliptic in the clas ..."
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Cited by 32 (4 self)
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Abstract. This paper is concerned with Hölder regularity of viscosity solutions of secondorder, fully nonlinear elliptic integrodifferential equations. Our results rely on two key ingredients: first we assume that, at each point of the domain, either the equation is strictly elliptic in the classical fully nonlinear sense, or (and this is the most original part of our work) the equation is strictly elliptic in a nonlocal nonlinear sense we make precise. Next we impose some regularity and growth conditions on the equation. These results are concerned with a large class of integrodifferential operators whose singular measures depend on x and also a large class of equations, including BellmanIsaacs Equations.