Lévy-Ito models in finance

DOI10.1214/21-PS1MaRDI QIDQ2039766zbMATH OpenOpenAlexFDO

Authors George Bouzianis, Lane P. Hughston, Sebastian Jaimungal, Leandro Sánchez-Betancourt

Publication date 5 July 2021

Published in Probability Surveys (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1907.08499

zbMATH Keywords

asset pricingforeign exchangeinterest rate modelsLévy measureLévy processesPoisson random measurepricing kernelsrisk aversionrisk premiumSiegel's paradoxVasicek model

Mathematics Subject Classification ID

Processes with independent increments; Lévy processes (60G51) Applications of stochastic analysis (to PDEs, etc.) (60H30) Derivative securities (option pricing, hedging, etc.) (91G20)

Abstract: We present an overview of the broad class of financial models in which the prices of assets are L'evy-Ito processes driven by an $n$-dimensional Brownian motion and an independent Poisson random measure. The Poisson random measure is associated with an $n$-dimensional L'evy process. Each model consists of a pricing kernel, a money market account, and one or more risky assets. We show how the excess rate of return above the interest rate can be calculated for risky assets in such models, thus showing the relationship between risk and return when asset prices have jumps. The framework is applied to a variety of asset classes, allowing one to construct new models as well as interesting generalizations of familiar models.

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Cited in

(11)

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