Evaluation of the MEMM, parameter estimation and option pricing for geometric Lévy processes (Q841858)

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Evaluation of the MEMM, parameter estimation and option pricing for geometric Lévy processes
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    Evaluation of the MEMM, parameter estimation and option pricing for geometric Lévy processes (English)
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    18 September 2009
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    The minimal entropy martingale measure (MEMM) for geometric Lévy processes proposed by \textit{T. Fujiwara} and \textit{Y. Miyahara} [Finance Stoch. 7, No. 4, 509--531 (2003; Zbl 1035.60040)] plays an important role in incomplete markets. In particular it can be used to arrive at the prices of certain derivatives. In general, the calibration of the MEMM is difficult since this requires to solve a rather complicated nonlinear integral equation. In order to arrive at approximate solutions of the corressonding integral equations the authors use Monte Carlo simulations such as the iteration and Newton method. This covers Lévy processes in the compound Poisson, stable, variance gamma, and the normal inverse Gaussian case. In one section, the authors illustrate parameter estimation methods based on the Markov chain Monte Carlo scheme. Another section is devoted to the calibration of option prices of European and Asian calls by using Nikkei financial data.
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    MEMM
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    iteration and Newton method
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    compound Poisson
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    VG
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    stable
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    CGMY
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    NIG
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    MCMC
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    mixture model
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    European and Asian option
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