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Finite Mixture Approximation of CARMA(p,q) Models

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  • Lorenzo Mercuri
  • Andrea Perchiazzo
  • Edit Rroji

Abstract

In this paper we show how to approximate the transition density of a CARMA(p, q) model driven by means of a time changed Brownian Motion based on the Gauss-Laguerre quadrature. We then provide an analytical formula for option prices when the log price follows a CARMA(p, q) model. We also propose an estimation procedure based on the approximated likelihood density.

Suggested Citation

  • Lorenzo Mercuri & Andrea Perchiazzo & Edit Rroji, 2020. "Finite Mixture Approximation of CARMA(p,q) Models," Papers 2005.10130, arXiv.org, revised May 2020.
    • Handle: RePEc:arx:papers:2005.10130
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    References listed on IDEAS

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