Quantile clocks

DOI10.1214/10-AAP752zbMATH Open1246.60027arXiv1003.3581OpenAlexW3037114938MaRDI QIDQ655573FDOQ655573

Lancelot F. James, Zhiyuan Zhang

Publication date: 4 January 2012

Published in: The Annals of Applied Probability (Search for Journal in Brave)

Abstract: Quantile clocks are defined as convolutions of subordinators $L$, with quantile functions of positive random variables. We show that quantile clocks can be chosen to be strictly increasing and continuous and discuss their practical modeling advantages as business activity times in models for asset prices. We show that the marginal distributions of a quantile clock, at each fixed time, equate with the marginal distribution of a single subordinator. Moreover, we show that there are many quantile clocks where one can specify $L$, such that their marginal distributions have a desired law in the class of generalized $s$-self decomposable distributions, and in particular the class of self-decomposable distributions. The development of these results involves elements of distribution theory for specific classes of infinitely divisible random variables and also decompositions of a gamma subordinator, that is of independent interest. As applications, we construct many price models that have continuous trajectories, exhibit volatility clustering and have marginal distributions that are equivalent to those of quite general exponential L'{e}vy price models. In particular, we provide explicit details for continuous processes whose marginals equate with the popular VG, CGMY and NIG price models. We also show how to perfectly sample the marginal distributions of more general classes of convoluted subordinators when $L$ is in a sub-class of generalized gamma convolutions, which is relevant for pricing of European style options.

Full work available at URL: https://arxiv.org/abs/1003.3581

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zbMATH Keywords

[https://portal.mardi4nfdi.de/w/index.php?title=+Special%3ASearch&search=L%EF%BF%BD%EF%BF%BDvy+processes&go=Go L��vy processes]generalized gamma convolutionsperfect samplingself-decomposable lawstime changed price processes

Mathematics Subject Classification ID

Infinitely divisible distributions; stable distributions (60E07) Processes with independent increments; Lévy processes (60G51) Financial applications of other theories (91G80) Exchangeability for stochastic processes (60G09)

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Cited In (7)

• Multivariate subordination using generalised gamma convolutions with applications to variance gamma processes and option pricing
• Risky Asset Models with Tempered Stable Fractal Activity Time
• A class of probability distributions that is closed with respect to addition as well as multiplication of independent random variables
• Title not available (Why is that?)
• A random integral calculus on generalized \(s\)-selfdecomposable probability measures
• Stochastic Volatility Models Based on OU-Gamma Time Change: Theory and Estimation
• Subordinators which are infinitely divisible w.r.t. time: Construction, properties, and simulation of max-stable sequences and infinitely divisible laws

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