Finite Mixture Approximation of CARMA(p,q) Models

Lorenzo Mercuri, Andrea Perchiazzo and Edit Rroji

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Abstract: In this paper we show how to approximate the transition density of a CARMA(p, q) model driven by means of a time changed Brownian Motion based on the Gauss-Laguerre quadrature. We then provide an analytical formula for option prices when the log price follows a CARMA(p, q) model. We also propose an estimation procedure based on the approximated likelihood density.

Date: 2020-05, Revised 2020-05
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2005.10130

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