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Multivariate L�vy processes with dependent jump intensity

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  • Roberto Marf�

Abstract

In this work we propose a new and general approach to build dependence in multivariate L�vy processes. We fully characterize a multivariate L�vy process whose margins are able to approximate any L�vy type. Dependence is generated by one or more common sources of jump intensity separately in jumps of any sign and size and a parsimonious method to determine the intensities of these common factors is proposed. Such a new approach allows the calibration of any smooth transition between independence and a large amount of linear dependence and provides greater flexibility in calibrating nonlinear dependence than in other comparable L�vy models in the literature. The model is analytically tractable and a straightforward multivariate simulation procedure is available. An empirical analysis shows an accurate multivariate fit of stock returns in terms of linear and nonlinear dependence. A numerical illustration of multi-asset option pricing emphasizes the importance of the proposed new approach for modeling dependence.

Suggested Citation

  • Roberto Marf�, 2011. "Multivariate L�vy processes with dependent jump intensity," Quantitative Finance, Taylor & Francis Journals, vol. 14(8), pages 1383-1398, July.
    • Handle: RePEc:taf:quantf:v:14:y:2011:i:8:p:1383-1398
    DOI: 10.1080/14697688.2011.606822
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    References listed on IDEAS

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    1. Laura Ballotta & Efrem Bonfiglioli, 2016. "Multivariate asset models using Lévy processes and applications," The European Journal of Finance, Taylor & Francis Journals, vol. 22(13), pages 1320-1350, October.
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