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Self-decomposability and option pricing

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Date
2007
Dewey
Economie financière
Sujet
Option pricing; Ornstein–Uhlenbeck Processes; Background Driving Lévy Processes; Scaling; Additive Processes
JEL code
G19
Journal issue
Mathematical Finance
Volume
17
Number
1
Publication date
01-2007
Article pages
31-57
Publisher
Wiley - Blackwell
DOI
http://dx.doi.org/10.1111/j.1467-9965.2007.00293.x
URI
https://basepub.dauphine.fr/handle/123456789/1380
Collections
  • DRM : Publications
Metadata
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Author
Yor, Marc
Madan, Dilip B.
Carr, Peter
Geman, Hélyette
Type
Article accepté pour publication ou publié
Abstract (EN)
The risk-neutral process is modeled by a four parameter self-similar process of independent increments with a self-decomposable law for its unit time distribution. Six different processes in this general class are theoretically formulated and empirically investigated. We show that all six models are capable of adequately synthesizing European option prices across the spectrum of strikes and maturities at a point of time. Considerations of parameter stability over time suggest a preference for two of these models. Currently, there are several option pricing models with 610 free parameters that deliver a comparable level of performance in synthesizing option prices. The dimension reduction attained here should prove useful in studying the variation over time of option prices.

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