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Multivariate Factor-Based Processes With Sato Margins

Author

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  • MARINA MARENA

    (Department of Economics and Statistics, Universitá di Torino, c.so Unione Sovietica 218bis, Torino, Italia)

  • ANDREA ROMEO

    (Department of Economics and Statistics, Universitá di Torino, c.so Unione Sovietica 218bis, Torino, Italia)

  • PATRIZIA SEMERARO

    (Department of Mathematical Science, Politecnico di Torino, c.so Duca Degli Abruzzi, 24, Torino, Italia)

Abstract

We introduce a class of multivariate factor-based processes with the dependence structure of Lévy ρα-models and Sato marginal distributions. We focus on variance gamma and normal inverse Gaussian marginal specifications for their analytical tractability and fit properties. We explore if Sato models, whose margins incorporate more realistic moments term structures, preserve the correlation flexibility in fitting option data. Since ρα-models incorporate nonlinear dependence, we also investigate the impact of Sato margins on nonlinear dependence and its evolution over time. Further, the relevance of nonlinear dependence in multivariate derivative pricing is examined.

Suggested Citation

  • Marina Marena & Andrea Romeo & Patrizia Semeraro, 2018. "Multivariate Factor-Based Processes With Sato Margins," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 21(01), pages 1-30, February.
    • Handle: RePEc:wsi:ijtafx:v:21:y:2018:i:01:n:s021902491850005x
    DOI: 10.1142/S021902491850005X
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    References listed on IDEAS

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    1. Elisa Luciano & Wim Schoutens, 2006. "A multivariate jump-driven financial asset model," Quantitative Finance, Taylor & Francis Journals, vol. 6(5), pages 385-402.
    2. Elisa Luciano & Marina Marena & Patrizia Semeraro, 2013. "Dependence Calibration and Portfolio Fit with FactorBased Time Changes," Carlo Alberto Notebooks 307, Collegio Carlo Alberto, revised 2015.
    3. Elisa Luciano & Marina Marena & Patrizia Semeraro, 2016. "Dependence calibration and portfolio fit with factor-based subordinators," Quantitative Finance, Taylor & Francis Journals, vol. 16(7), pages 1037-1052, July.
    4. Peter Carr & Hélyette Geman & Dilip B. Madan & Marc Yor, 2007. "Self‐Decomposability And Option Pricing," Mathematical Finance, Wiley Blackwell, vol. 17(1), pages 31-57, January.
    5. Ernst Eberlein & Dilip Madan, 2009. "Sato processes and the valuation of structured products," Quantitative Finance, Taylor & Francis Journals, vol. 9(1), pages 27-42.
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    7. repec:dau:papers:123456789/1380 is not listed on IDEAS
    8. Patrizia Semeraro, 2006. "A Multivariate Time-Changed Lévy Model for Financial Applications," ICER Working Papers - Applied Mathematics Series 10-2006, ICER - International Centre for Economic Research.
    9. Richard Finlay & Eugene Seneta, 2008. "Option Pricing With Vg–Like Models," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 11(08), pages 943-955.
    10. Marina Marena & Andrea Romeo & Patrizia Semeraro, 2015. "Pricing multivariate barrier reverse convertibles with factor-based subordinators," Carlo Alberto Notebooks 439, Collegio Carlo Alberto.
    11. Sato, Ken-iti, 2001. "Subordination and self-decomposability," Statistics & Probability Letters, Elsevier, vol. 54(3), pages 317-324, October.
    12. Patrizia Semeraro, 2008. "A Multivariate Variance Gamma Model For Financial Applications," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 11(01), pages 1-18.
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    Cited by:

    1. Patrizia Semeraro, 2021. "Multivariate tempered stable additive subordination for financial models," Papers 2105.00844, arXiv.org, revised Sep 2021.
    2. Patrizia Semeraro, 2022. "Multivariate tempered stable additive subordination for financial models," Mathematics and Financial Economics, Springer, volume 16, number 3, June.
    3. Giovanni Amici & Paolo Brandimarte & Francesco Messeri & Patrizia Semeraro, 2023. "Multivariate L\'evy Models: Calibration and Pricing," Papers 2303.13346, arXiv.org, revised Jul 2023.

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