FINANCIAL MODELING AND OPTION THEORY WITH THE TRUNCATED LEVY PROCESS

Andrew Matacz ()
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Andrew Matacz: School of Mathematics, University of Sydney, Australia 2006, Australia

International Journal of Theoretical and Applied Finance (IJTAF), 2000, vol. 03, issue 01, 143-160

Abstract: In recent studies the truncated Levy process (TLP) has been shown to be very promising for the modeling of financial dynamics. In contrast to the Levy process, the TLP has finite moments and can account for both the previously observed excess kurtosis at short timescales, along with the slow convergence to Gaussian at longer timescales. In this paper I further test the truncated Levy paradigm using high frequency data from the Australian All Ordinaries share market index. I then consider an optimal option hedging strategy which is appropriate for the early Levy dominated regime. This is compared with the usual delta hedging approach and found to differ significantly.

Keywords: Random walks; Levy processes; scaling theory; option pricing (search for similar items in EconPapers)
Date: 2000
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Citations: View citations in EconPapers (27)

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DOI: 10.1142/S0219024900000073

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