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Calibration of selfdecomposable Lévy models

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  • Mathias Trabs

Abstract

We study the nonparametric calibration of exponential, self-decomposable Levy models whose jump density can be characterized by the k-function, which is typically nonsmooth at zero. On the one hand the estimation of the drift, the activity measure alpha:= k(0+) + k(0-) and analog parameters for the derivatives are considered and on the other hand we estimate the k-function outside of a neighborhood of zero. Minimax convergence rates are derived, which depend on . Therefore, we construct estimators adapting to this unknown parameter. Our estimation method is based on spectral representations of the observed option prices and on regularization by cutting off high frequencies. Finally, the procedure is applied to simulations and real data.

Suggested Citation

  • Mathias Trabs, 2011. "Calibration of selfdecomposable Lévy models," SFB 649 Discussion Papers SFB649DP2011-073, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  • Handle: RePEc:hum:wpaper:sfb649dp2011-073
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    References listed on IDEAS

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    More about this item

    Keywords

    adaptation; European option; in nite activity jump process; minimax rates; non linear inverse problem; self-decomposability;

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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