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Financial Modeling And Option Theory With The Truncated Levy Process

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  • ANDREW MATACZ

    (School of Mathematics, University of Sydney, Australia 2006, Australia)

Abstract

In recent studies the truncated Levy process (TLP) has been shown to be very promising for the modeling of financial dynamics. In contrast to the Levy process, the TLP has finite moments and can account for both the previously observed excess kurtosis at short timescales, along with the slow convergence to Gaussian at longer timescales. In this paper I further test the truncated Levy paradigm using high frequency data from the Australian All Ordinaries share market index. I then consider an optimal option hedging strategy which is appropriate for the early Levy dominated regime. This is compared with the usual delta hedging approach and found to differ significantly.

Suggested Citation

  • Andrew Matacz, 2000. "Financial Modeling And Option Theory With The Truncated Levy Process," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 3(01), pages 143-160.
    • Handle: RePEc:wsi:ijtafx:v:03:y:2000:i:01:n:s0219024900000073
    DOI: 10.1142/S0219024900000073
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