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Stochastic Volatility for Levy Processes

Listed author(s):
  • Helyette Geman

    (DRM - Dauphine Recherches en Management - Université Paris-Dauphine - CNRS - Centre National de la Recherche Scientifique)

  • P. Carr

    (DRM - Dauphine Recherches en Management - Université Paris-Dauphine - CNRS - Centre National de la Recherche Scientifique)

  • D. Madan

    (DRM - Dauphine Recherches en Management - Université Paris-Dauphine - CNRS - Centre National de la Recherche Scientifique)

  • M. Yor

    (DRM - Dauphine Recherches en Management - Université Paris-Dauphine - CNRS - Centre National de la Recherche Scientifique)

Registered author(s):

    Three processes reflecting persistence of volatility are initially formulated by evaluating three Lévy processes at a time change given by the integral of a mean-reverting square root process. The model for the mean-reverting time change is then generalized to include non-Gaussian models that are solutions to Ornstein-Uhlenbeck equations driven by one-sided discontinuous Lévy processes permitting correlation with the stock. Positive stock price processes are obtained by exponentiating and mean correcting these processes, or alternatively by stochastically exponentiating these processes. The characteristic functions for the log price can be used to yield option prices via the fast Fourier transform. In general mean-corrected exponentiation performs better than employing the stochastic exponential. It is observed that the mean-corrected exponential model is not a martingale in the filtration in which it is originally defined. This leads us to formulate and investigate the important property of martingale marginals where we seek martingales in altered filtrations consistent with the one-dimensional marginal distributions of the level of the process at each future date.

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    Paper provided by HAL in its series Post-Print with number halshs-00144385.

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    Date of creation: 2003
    Publication status: Published in Mathematical Finance, Wiley, 2003, 13 (3), pp.345-382
    Handle: RePEc:hal:journl:halshs-00144385
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00144385
    Contact details of provider: Web page: https://hal.archives-ouvertes.fr/

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