Finite mixture approximation of CARMA(p,q) models

DOI10.1137/20M1363248MaRDI QIDQ5013835zbMATH OpenOpenAlexFDO

Authors Lorenzo Mercuri, Andrea Perchiazzo, Edit Rroji

Publication date 2 December 2021

Published in SIAM Journal on Financial Mathematics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2005.10130

zbMATH Keywords

continuous-time ARMA processespricing derivativestransition density

Mathematics Subject Classification ID

Applications of Brownian motions and diffusion theory (population genetics, absorption problems, etc.) (60J70) Derivative securities (option pricing, hedging, etc.) (91G20) Interest rates, asset pricing, etc. (stochastic models) (91G30)

Abstract: In this paper we show how to approximate the transition density of a CARMA(p, q) model driven by means of a time changed Brownian Motion based on the Gauss-Laguerre quadrature. We then provide an analytical formula for option prices when the log price follows a CARMA(p, q) model. We also propose an estimation procedure based on the approximated likelihood density.

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Cited in

(2)

• Some computational aspects of Gaussian CARMA modelling
• An efficient unified approach for spread option pricing in a copula market model

Describes a project that uses

Uses Software

• YUIMA

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