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Towards a Δ-Gamma Sato multivariate model

Tijdschriftbijdrage - Tijdschriftartikel

The increased trading in multi-name financial products has paved the way for the use of multivariate models that are at once computationally tractable and flexible enough to mimic the stylized facts of asset log-returns and of their dependence structure. In this paper we propose a new multivariate Lévy model, the so-called Δ-Gamma model, where the log-price gains and losses are modeled by separate multivariate Gamma processes, each containing a common and an idiosyncratic component. Furthermore, we extend this multivariate model to the Sato setting, allowing for a moment term structure that is more in line with empirical evidence. We calibrate the two models on single-name option price surfaces and market implied correlations and we show how the Δ-Gamma Sato model outperforms its Lévy counterpart, especially during periods of market turmoil. The numerical study also reveals the advantages of these new types of multivariate models, compared to a multivariate VG model.
Tijdschrift: Review of derivatives research
ISSN: 1380-6645
Volume: 23
Pagina's: 1 - 39
Jaar van publicatie:2020
Trefwoorden:A1 Journal article
BOF-keylabel:ja
BOF-publication weight:0.1
CSS-citation score:1
Authors from:Higher Education
Toegankelijkheid:Open