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Polynomial processes and their applications to mathematical Finance
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In this paper, the authors introduce a class of Markov processes, called $m$-polynomial, for which the calculation of (mixed) moments up to order$m$ only requires the computation of matrix exponentials.Abstract:
We introduce a class of Markov processes, called $m$-polynomial, for which the calculation of (mixed) moments up to order $m$ only requires the computation of matrix exponentials. This class contains affine processes, processes with quadratic diffusion coefficients, as well as L\'evy-driven SDEs with affine vector fields. Thus, many popular models such as exponential L\'evy models or affine models are covered by this setting. The applications range from statistical GMM estimation procedures to new techniques for option pricing and hedging. For instance, the efficient and easy computation of moments can be used for variance reduction techniques in Monte Carlo methods.read more
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Properties of Foreign Exchange Risk Premiums
TL;DR: The authors study the properties of foreign exchange risk premiums that can explain the forward bias puzzle, defined as the tendency of high-interest rate currencies to appreciate rather than depreciate, and find that risk premiums arise endogenously from the no-arbitrage condition relating the term structure of interest rates and exchange rates.
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Hawkes Process: Fast Calibration, Application to Trade Clustering and Diffusive Limit
José Da Fonseca,Riadh Zaatour +1 more
TL;DR: This study provides explicit formulas for the moments and the autocorrelation function of the number of jumps over a given interval for a self‐excited Hawkes process, and an implementation of the method of moments for parameter estimation that leads to an fast optimization algorithm.
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Density Approximations for Multivariate Affine Jump-Diffusion Processes
TL;DR: In this article, the authors introduce closed-form transition density expansions for multivariate affine jump-diffusion processes, which rely on a general approximation theory which is developed in weighted Hilbert spaces for random variables which possess all polynomial moments.
Journal ArticleDOI
Properties of foreign exchange risk premiums
TL;DR: This article study the properties of foreign exchange risk premiums that can explain the forward bias puzzle, defined as the tendency of high-interest rate currencies to appreciate rather than depreciate, and find that these risk premiums arise endogenously from the no-arbitrage condition relating the term structure of interest rates and exchange rates.
Journal ArticleDOI
A general framework for time-changed Markov processes and applications
TL;DR: A two-layer approximation scheme is developed by further approximating the driving process in constructing the time change using an independent CTMC and derives the functional equation characterizing the double transforms of the transition matrix of the resulting time-changed CTMC.
References
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Book
Continuous martingales and Brownian motion
Daniel Revuz,Marc Yor +1 more
TL;DR: In this article, the authors present a comprehensive survey of the literature on limit theorems in distribution in function spaces, including Girsanov's Theorem, Bessel Processes, and Ray-Knight Theorem.
Book
Limit Theorems for Stochastic Processes
Jean Jacod,Albert N. Shiryaev +1 more
TL;DR: In this article, the General Theory of Stochastic Processes, Semimartingales, and Stochastically Integrals is discussed and the convergence of Processes with Independent Increments is discussed.
Book
One-Parameter Semigroups for Linear Evolution Equations
Klaus-Jochen Engel,Rainer Nagel +1 more
TL;DR: In this paper, Spectral Theory for Semigroups and Generators is used to describe the exponential function of a semigroup and its relation to generators and resolvents.
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Option valuation using the fast Fourier transform
Peter Carr,Dilip B. Madan +1 more
TL;DR: In this paper, the fast Fourier transform is used to value options when the characteristic function of the return is known analytically, and it is shown how to use it for value selection.
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