Asymmetric skew Bessel processes and their applications to finance (Q2571223)

Brownian motion and Bessel processes play an essential role in financial mathematics. This article proposes a refinement of the skew Bessel processes introduced by \textit{M. Barlow, J. Pitman}, and \textit{M. Yor} [Séminaire de probabilités XXIII, Lect. Notes Math. 1372, 275--293 (1989; Zbl 0747.60072)], called asymmetric skew Bessel processes. The main properties of these processes are then thoroughly investigated, following the lines of \textit{J. M. Harrison}, and \textit{L. A. Shepp}, [Ann. Probab. 9, 309--313 (1981; Zbl 0462.60076)]. A couple of instances where asymmetric skew Bessel processes can be applied to the pricing of certain financial instruments are shown. The asymmetric skew Bessel process of order two skewed by \(\beta\) at \(a>0\), \(R^{(2)}_{\beta}\), is constructed from its scale function and speed measure which are both discontinuous at \(a\). \(R^{(2)}_{\beta}\) is a continuous semimartingale that is a solution of a stochastic differential equation involving its local time. Then, the definition of an asymmetric skew Bessel process can be extended to fractional orders and some invariance properties established. By using generalized diffusion processes, the asymmetric skew Bessel process of dimension \(d=2,3,\ldots\) are represented as the distance to the origin of some multi-dimensional skew Brownian motion. Two Lamperti-like factorizations involving time changed asymmetric skew Bessel processes are obtained and immediately applied to the analysis of perpetuities. Finally, an application to the pricing of weighted Asian options is presented.