Advanced Search
MyIDEAS: Login to save this paper or follow this series

Financial modeling and option theory with the truncated Lévy process

Contents:

Author Info

  • Andrew Matacz

    (Science & Finance, Capital Fund Management)

Registered author(s):

    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. I further test the truncated Levy paradigm using high frequency data from the Australian All Ordinaries share market index. I then consider, for the early Levy dominated regime, the issue of option hedging for two different hedging strategies that are in some sense optimal. These are compared with the usual delta hedging approach and found to differ significantly. I also derive the natural generalization of the Black-Scholes option pricing formula when the underlying security is modeled by a geometric TLP. This generalization would not be possible without the truncation.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://cfm.fr/images/stories/pdf/publication/options/financial_modeling_and_option_theory_with_the_truncated_levy_process.pdf
    Our checks indicate that this address may not be valid because: 404 Not Found (http://cfm.fr/images/stories/pdf/publication/options/financial_modeling_and_option_theory_with_the_truncated_levy_process.pdf [302 Found]--> https://www.cfm.fr/images/stories/pdf/publication/options/financial_modeling_and_option_theory_with_the_truncated_levy_process.pdf). If this is indeed the case, please notify (Marc Potters)
    Download Restriction: no

    Bibliographic Info

    Paper provided by Science & Finance, Capital Fund Management in its series Science & Finance (CFM) working paper archive with number 500035.

    as in new window
    Length:
    Date of creation: Oct 1997
    Date of revision:
    Publication status: Published in International Journal of Theoretical and Applied Finance 3, 143, (2000)
    Handle: RePEc:sfi:sfiwpa:500035

    Contact details of provider:
    Postal: 6 boulevard Haussmann, 75009 Paris, FRANCE
    Phone: +33.1.4949.5949
    Fax: +33.1.4770.1740
    Email:
    Web page: http://www.science-finance.fr/
    More information through EDIRC

    Related research

    Keywords:

    Find related papers by JEL classification:

    This paper has been announced in the following NEP Reports:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Akgiray, Vedat & Booth, G Geoffrey, 1988. "The Stable-Law Model of Stock Returns," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 6(1), pages 51-57, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Borak, Szymon & Misiorek, Adam & Weron, Rafal, 2010. "Models for Heavy-tailed Asset Returns," MPRA Paper 25494, University Library of Munich, Germany.
    2. Sergei Levendorskii, 2004. "The American put and European options near expiry, under Levy processes," Papers cond-mat/0404103, arXiv.org.
    3. Alvaro Cartea, 2005. "Dynamic Hedging of Financial Instruments When the Underlying Follows a Non-Gaussian Process," Birkbeck Working Papers in Economics and Finance, Birkbeck, Department of Economics, Mathematics & Statistics 0508, Birkbeck, Department of Economics, Mathematics & Statistics.
    4. Adam Misiorek & Rafal Weron, 2010. "Heavy-tailed distributions in VaR calculations," HSC Research Reports, Hugo Steinhaus Center, Wroclaw University of Technology HSC/10/05, Hugo Steinhaus Center, Wroclaw University of Technology.
    5. Weron, Rafał, 2004. "Computationally intensive Value at Risk calculations," Papers 2004,32, Humboldt-Universität Berlin, Center for Applied Statistics and Economics (CASE).
    6. Lehnert, Thorsten & Wolff, Christian C, 2001. "Modelling Scale-Consistent VaR with the Truncated Lévy Flight," CEPR Discussion Papers 2711, C.E.P.R. Discussion Papers.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:sfi:sfiwpa:500035. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marc Potters).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.