Multivariate L�vy processes with dependent jump intensity

Roberto Marf�
Authors registered in the RePEc Author Service: Roberto Marfe ()

Quantitative Finance, 2011, vol. 14, issue 8, 1383-1398

Abstract: In this work we propose a new and general approach to build dependence in multivariate L�vy processes. We fully characterize a multivariate L�vy process whose margins are able to approximate any L�vy type. Dependence is generated by one or more common sources of jump intensity separately in jumps of any sign and size and a parsimonious method to determine the intensities of these common factors is proposed. Such a new approach allows the calibration of any smooth transition between independence and a large amount of linear dependence and provides greater flexibility in calibrating nonlinear dependence than in other comparable L�vy models in the literature. The model is analytically tractable and a straightforward multivariate simulation procedure is available. An empirical analysis shows an accurate multivariate fit of stock returns in terms of linear and nonlinear dependence. A numerical illustration of multi-asset option pricing emphasizes the importance of the proposed new approach for modeling dependence.

Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:14:y:2011:i:8:p:1383-1398

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DOI: 10.1080/14697688.2011.606822

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