Balakrishna, BS (2010): Alpha-root Processes for Derivatives pricing.
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A class of mean reverting positive stochastic processes driven by alpha-stable distributions are discussed. A subclass of affine processes, they are referred to here as alpha-root processes in analogy to the square root process or the Cox-Ingersoll-Ross process derived from the Brownian motion. Being affine, they provide semi-analytical results for the implied term structures as well as for the characteristic exponents for their associated distributions. Their use has not been appreciated in the field perhaps due to lack of an efficient numerical algorithm to supplement their semi-analytical results. The present article introduces a formulation that admits an efficient simulation algorithm to enable an extensive investigation of their properties.
|Item Type:||MPRA Paper|
|Original Title:||Alpha-root Processes for Derivatives pricing|
|Keywords:||alpha-root process; square-root process; Cox-Ingersoll-Ross; CIR; stable process; Levy process; affine process; term-structure model; volatility smile|
|Subjects:||C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C16 - Specific Distributions
C - Mathematical and Quantitative Methods > C4 - Econometric and Statistical Methods: Special Topics > C46 - Specific Distributions; Specific Statistics
C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C15 - Statistical Simulation Methods: General
G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing; Futures Pricing
|Depositing User:||S Balakrishna|
|Date Deposited:||17. Jan 2010 18:43|
|Last Modified:||21. Feb 2013 16:30|
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J. C. Cox, J. E. Ingersoll and S. A. Ross (1985), ``A theory of the term structure of interest rates'', Econometrica 53 (1985) 385-408.
D. Duffie, D. Filipovic, and W. Schachermayer (2003), ``Affine processes and applications in finance'', The Annals of Applied Probability 13 (2003), 984–1053.
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Alpha-root Processes for Derivatives pricing. (deposited 11. Jan 2010 17:32)
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