A multivariate Levy process model with linear correlation

Reiichiro Kawai

Quantitative Finance, 2009, vol. 9, issue 5, 597-606

Abstract: In this paper, we develop a multivariate risk-neutral Levy process model and discuss its applicability in the context of the volatility smile of multiple assets. Our formulation is based upon a linear combination of independent univariate Levy processes and can easily be calibrated to a set of one-dimensional marginal distributions and a given linear correlation matrix. We derive conditions for our formulation and the associated calibration procedure to be well-defined and provide some examples associated with particular Levy processes permitting a closed-form characteristic function. Numerical results of the option premiums on three currencies are presented to illustrate the effectiveness of our formulation with different linear correlation structures.

Keywords: Volatility modelling; Stochastic jumps; Non-Gaussian option pricing; Non-Gaussian distributions; Multivariate volatility; Model calibration; Mathematical finance; Implementation of pricing (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (8)

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DOI: 10.1080/14697680902744729

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