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The fractional volatility model: No-arbitrage, leverage and risk measures

  • R. Vilela Mendes
  • Maria Jo\~ao Oliveira

Based on a criterium of mathematical simplicity and consistency with empirical market data, a stochastic volatility model has been obtained with the volatility process driven by fractional noise. Depending on whether the stochasticity generators of log-price and volatility are independent or are the same, two versions of the model are obtained with different leverage behavior. Here, the no-arbitrage and incompleteness properties of the model are studied. Some risk measures are also discussed in this framework.

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File URL: http://arxiv.org/pdf/1007.2817
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Paper provided by arXiv.org in its series Papers with number 1007.2817.

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Date of creation: Jul 2010
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Handle: RePEc:arx:papers:1007.2817
Contact details of provider: Web page: http://arxiv.org/

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