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Tempered stable Lévy motion driven by stable subordinator

Author

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  • Gajda, Janusz
  • Wyłomańska, Agnieszka

Abstract

In this article we propose a new model for financial data description. Combining two independent mechanisms, namely the tempered stable process and inverse stable subordinator, we obtain a new model which captures not only the tempered stable character of the underlying data but also such a property as periods in which the values of an asset stay on the same level. Moreover, we classify our system to the family of subdiffusive processes and investigate its tail behavior. We describe in detail testing and estimation procedures for the proposed model. In the last step we calibrate our model to the real data.

Suggested Citation

  • Gajda, Janusz & Wyłomańska, Agnieszka, 2013. "Tempered stable Lévy motion driven by stable subordinator," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(15), pages 3168-3176.
  • Handle: RePEc:eee:phsmap:v:392:y:2013:i:15:p:3168-3176 DOI: 10.1016/j.physa.2013.03.018
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    References listed on IDEAS

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    1. Dilip B. Madan & Peter P. Carr & Eric C. Chang, 1998. "The Variance Gamma Process and Option Pricing," Review of Finance, European Finance Association, vol. 2(1), pages 79-105.
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    5. Chris Brooks & Alešs Černý & Joëlle Miffre, 2012. "Optimal hedging with higher moments," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 32(10), pages 909-944, October.
    6. Yuichi Kitamura & Michael Stutzer, 1997. "An Information-Theoretic Alternative to Generalized Method of Moments Estimation," Econometrica, Econometric Society, vol. 65(4), pages 861-874, July.
    7. F. Douglas Foster & Charles H. Whiteman, 2002. "Bayesian Cross Hedging: An Example From the Soybean Market," Australian Journal of Management, Australian School of Business, vol. 27(2), pages 95-122, December.
    8. Sornette, Didier, 1998. "Large deviations and portfolio optimization," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 256(1), pages 251-283.
    9. Duffy, Ken & Lobunets, Olena & Suhov, Yuri, 2007. "Loss aversion, large deviation preferences and optimal portfolio weights for some classes of return processes," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 378(2), pages 408-422.
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    Citations

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    Cited by:

    1. Gong, Xiaoli & Zhuang, Xintian, 2017. "American option valuation under time changed tempered stable Lévy processes," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 466(C), pages 57-68.
    2. repec:eee:phsmap:v:483:y:2017:i:c:p:83-93 is not listed on IDEAS
    3. Gong, Xiaoli & Zhuang, Xintian, 2017. "Measuring financial risk and portfolio reversion with time changed tempered stable Lévy processes," The North American Journal of Economics and Finance, Elsevier, vol. 40(C), pages 148-159.
    4. repec:eee:phsmap:v:486:y:2017:i:c:p:628-637 is not listed on IDEAS

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