Journal ArticleDOI
Analytical pricing formulas for discretely sampled generalized variance swaps under stochastic time change
Zhigang Tong,Allen Liu +1 more
- Vol. 04, pp 1750028
TLDR
In this article, a new class of models for pricing generalized variance swaps is proposed, in which the process for the asset price is a function of a general time-homogeneous diffusion process belonging to a symmetric pricing semigroup, time changed by a composition of a Levy subordinator and an absolutely continuous process.Abstract:
We propose a new class of models for pricing generalized variance swaps. We assume that, in the most general form, the process for the asset price is a function of a general time-homogeneous diffusion process belonging to a symmetric pricing semigroup, time changed by a composition of a Levy subordinator and an absolutely continuous process. We derive the analytical pricing formulas for various types of generalized variance swaps based on eigenfunction expansion method. We also numerically implement the model and test its sensitivity to some of the key parameters of the model.read more
Citations
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Journal ArticleDOI
The Pricing of Dual-Expiry Exotics with Mean Reversion and Jumps
TL;DR: In this paper, the authors developed a new class of models for pricing dual-expiry options that are characterized by two expiry dates, where the underlying asset price is modeled by a time changed exponential Ornstein Uhlenbeck (OU) process, and the time change process is a Levy subordinator.
Journal ArticleDOI
A recursive pricing method for autocallables under multivariate subordination
TL;DR: In this paper, the authors developed a new class of models for pricing autocallables based on multivariate subordinate Orstein Uhlenbeck (OU) processes, which introduced state-dependent jumps in the asset prices and the dependence among jumps is governed by the Levy measure of the d-dimensional subordinator.
Journal ArticleDOI
Option pricing in a subdiffusive constant elasticity of variance (CEV) model
Kevin Z. Tong,Allen Liu +1 more
TL;DR: In this article, the authors extend the classical constant elasticity of variance (CEV) model to a subdiffusive CEV model, where the underlying CEV process is time changed by an inverse α-stable subordinator.
Journal ArticleDOI
Modeling temperature and pricing weather derivatives based on subordinate Ornstein-Uhlenbeck processes
TL;DR: In this article, the authors employ a time-changed Ornstein-Uhlenbeck (OU) process for modeling temperature and pricing weather derivatives, where the time change process is a Levy subordinator time changed by a deterministic clock with seasonal activity rate.
Journal ArticleDOI
A censored Ornstein–Uhlenbeck process for rainfall modeling and derivatives pricing
Zhigang Tong,Allen Liu +1 more
TL;DR: In this paper, the authors proposed to model rainfall based on a continuous time latent process, where both parts of rainfall process are determined by a censored power-transformed Ornstein-Uhlenbeck (OU) process.
References
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Journal ArticleDOI
A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options
TL;DR: In this paper, a closed-form solution for the price of a European call option on an asset with stochastic volatility is derived based on characteristi c functions and can be applied to other problems.
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Time-Changed Levy Processes and Option Pricing ⁄
Peter Carr,Peter Carr,Liuren Wu +2 more
TL;DR: The classic Black-Scholes option pricing model assumes that returns follow Brownian motion, but return processes differ from this benchmark in at least three important ways: asset prices jump, leading to non-normal return innovations as discussed by the authors.
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TL;DR: In this paper, a spectral expansion approach to the valuation of contingent claims when the underlying state variable follows a one-dimensional diffusion with the infinitesimal variance a2(x), drift b(x) and instantaneous discount (killing) rate r(x).
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