GENERALIZED BARNDORFF-NIELSEN AND SHEPHARD MODEL AND DISCRETELY MONITORED OPTION PRICING

Akira Yamazaki ()
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Akira Yamazaki: Graduate School of Business Administration, Hosei University, The Research Institute for Innovation Management, 2-17-1 Fujimi, Chiyoda-ku, Tokyo 102-8160, Japan

International Journal of Theoretical and Applied Finance (IJTAF), 2016, vol. 19, issue 04, 1-34

Abstract: This paper proposes a generalization of the Barndorff-Nielsen and Shephard model, in which the log return on an asset is governed by a Lévy process with stochastic volatility modeled by a non-Gaussian Ornstein–Uhlenbeck process. Under the generalized model, we derive a closed-form expression of the multivariate characteristic function of the intertemporal joint distribution of the underlying log return. Then, we also investigate asymptotic behavior of the log return and its variance. Moreover, we evaluate discretely monitored path-dependent derivatives such as geometric Asian, forward start, barrier, fade-in, and lookback options as well as European options.

Keywords: Ornstein–Uhlenbeck process; Lévy process; intertemporal joint distribution; multivariate characteristic function; asymptotic analysis; discretely monitored path-dependent option (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (3)

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DOI: 10.1142/S0219024916500242

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