Orthogonal Expansions for VIX Options Under Affine Jump Diffusions
| Autor: | Elisa Nicolato, Andrea Barletta |
|---|---|
| Jazyk: | angličtina |
| Rok vydání: | 2018 |
| Předmět: |
Work (thermodynamics)
IMPACT Orthogonal polynomials Gaussian VALUATION MODELS Probability density function APPROXIMATIONS 01 natural sciences STOCHASTIC VOLATILITY symbols.namesake 010104 statistics & probability PRICES 0502 economics and business Applied mathematics 050207 economics 0101 mathematics Real line Mathematics RISK 050208 finance 05 social sciences VARIANCE Laguerre expansions Affine jump diffusion Fourier transform Laguerre polynomials symbols Jump VIX options Affine transformation General Economics Econometrics and Finance Mathematical economics Finance Taylor expansions for the moments of functions of random variables |
| Zdroj: | Barletta, A & Nicolato, E 2018, ' Orthogonal Expansions for VIX Options Under Affine Jump Diffusions ', Quantitative Finance, vol. 18, no. 6, pp. 951-967 . https://doi.org/10.1080/14697688.2017.1371322 |
| DOI: | 10.1080/14697688.2017.1371322 |
| Popis: | In this work we derive new closed-form pricing formulas for VIX options in the jump-diffusion SVJJ model proposed by Duffie et al. (2000). Our approach is based on the classic methodology of approximating a density function with an orthogonal expansion of polynomials weighted by a kernel. Orthogonal expansions based on the Gaussian distribution, such as Edgeworth or Gram-Charlier expansions, have been successfully employed by a number of authors in the context of equity options. However, these expansions are not quite suitable for volatility or variance densities as they inherently assign positive mass to the negative real line. Here we approximate option prices via expansions that instead are based on kernels defined on the positive real line. Specifically, we consider a flexible family of distributions, which generalizes the gamma kernel associated with the classic Laguerre expansions. The method can be employed whenever the moments of the underlying variance distribution are known. It provides fast and accurate price computations, and therefore it represents a valid and possibly more robust alternative to pricing techniques based on Fourier transform inversions. |
| Databáze: | OpenAIRE |
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