L\'evy models amenable to efficient calculations

arXiv2207.02359MaRDI QIDQ6404098FDOQ6404098

Authors: Svetlana Boyarchenko, Sergei Levendorskiĭ 

Publication date: 5 July 2022

Abstract: In our previous publications (IJTAF 2019, Math. Finance 2020), we introduced a general class of SINH-regular processes and demonstrated that efficient numerical methods for the evaluation of the Wiener-Hopf factors and various probability distributions (prices of options of several types) in L'evy models can be developed using only a few general properties of the characteristic exponent $psi$. Essentially all popular L'evy processes enjoy these properties. In the present paper, we define classes of Stieltjes-L'evy processes (SL-processes) as processes with completely monotone L'evy densities of positive and negative jumps, and signed Stieltjes-L'evy processes (sSL-processes) as processes with densities representable as differences of completely monotone densities. We demonstrate that 1) all crucial properties of $psi$ are consequences of the representation $psi(xi)=(a_2^{+}x{i}^2-i{a}_1^{+}xi)ST(c{G}_{+})(-ixi)+(a_2^{-}x{i}^2+i{a}_1^{-}xi)ST(c{G}_{-})(ixi)+(s{g}^2/2)x{i}^2-imuxi$, where $ST(cG)$ is the Stieltjes transform of the (signed) Stieltjes measure $cG$ and $a^p{m}_{j}ge0$; 2) essentially all popular processes other than Merton's model and Meixner processes areSL-processes; 3) Meixner processes are sSL-processes; 4) under a natural symmetry condition, essentially all popular classes of L'evy processes are SL- or sSL-subordinated Brownian motion.

Mathematics Subject Classification ID

Computational methods for problems pertaining to probability theory (60-08) Monte Carlo methods (65C05) Derivative securities (option pricing, hedging, etc.) (91G20) Stable stochastic processes (60G52)

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