Moment Properties of Probability Distributions Used in Stochastic Financial Models

Jordan Stoyanov

Chapter 1 in Recent Advances in Financial Engineering 2014:Proceedings of the TMU Finance Workshop 2014, 2016, pp 1-27 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Our goal in this paper is to look at stochastic financial models and especially on those properties of the involved distributions which are expressed in terms of the moments. The questions discussed and the results presented reveal the role which the moments play in the analysis of distributions. Interesting conclusions can be derived in both cases when available are finitely many moments and when we know all moments.Among the results included in the paper are sharp lower and/or upper bounds for option prices in terms of a finite number of moments. However the main attention is paid to the determinacy of distributions by their moments. While any light tailed distribution is uniquely determined by its moments, the uniqueness may fail for heavy tailed distributions. And, here is the point. Heavy tailed distributions are essentially involved in stock market modelling, and most of them are non-unique in terms of the moments. This is why the phenomenon non-uniqueness of distributions deserves a special attention.We treat distributions on the positive half-line used to describe, e.g., stock prices and option prices, and distributions on the whole real line describing log-returns. For reader's convenience we give a brief and unified general picture of existing results about uniqueness and non-uniqueness of distribution in terms of their moments. Some of the results are classical and well-known. In several cases we provide here new arguments along with presenting new recent results on the moment determinacy of random variables and their non-linear transformations and also of stochastic processes which are solutions to SDEs.

Keywords: Financial Engineering; Mathematical Finance; Money & Banking; Risk Management; Real Option; Corporate Finance; Computational Finance (search for similar items in EconPapers)
Date: 2016
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