Mixed Lognormal Distributions for Derivatives Pricing and Risk-Management

Dietmar Leisen

No 48, Computing in Economics and Finance 2004 from Society for Computational Economics

Abstract: Many derivatives prices and their Greeks are closed-form expressions in the Black-Scholes model; when the terminal distribution is a mixed lognormal, prices and Greeks for these derivatives are then a weighted average of these closed-form) expressions. They can therefore be calculated easily and efficiently for mixed lognormal distributions. This paper constructs mixed lognormal distributions that approximate the terminal distribution in the Merton model (Black-Scholes model with jumps) and in stochastic volatility models. Main applications are the pricing of large portfolio positions and their risk-management

Keywords: mixed lognormal distribution; jump-diffusion; stochastic volatility; Greeks; risk-management (search for similar items in EconPapers)
JEL-codes: C63 G13 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-fin and nep-rmg
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:sce:scecf4:48

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