Multivariate additive subordination with applications in finance

Giovanni Amici, Laura Ballotta and Patrizia Semeraro

European Journal of Operational Research, 2025, vol. 321, issue 3, 1004-1020

Abstract: We introduce a tractable multivariate pure jump process in which the trading time is described by an additive subordinator. The multivariate process retains the additivity property, and therefore is time inhomogeneous, i.e., its increments are independent but non stationary. We provide the theoretical framework of our process, perform a sensitivity analysis with respect to the time inhomogeneity parameters, and design a Monte Carlo scheme to simulate the trajectories of the process. We then employ the model in the context of option pricing in the FX market. We take advantage of the specific features of currency triangles to extract the joint dynamics of FX log-rates. Extensive tests based on observed market data show that our model outperforms well established pure jump benchmarks.

Keywords: Finance; Additive subordination; Multivariate stochastic processes; Option pricing; Currency triangles (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:321:y:2025:i:3:p:1004-1020

DOI: 10.1016/j.ejor.2024.10.010

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