Quantile clocks

DOI10.1214/10-AAP752MaRDI QIDQ655573zbMATH OpenOpenAlexFDO

Authors Lancelot F. James, Zhiyuan Zhang

Publication date 4 January 2012

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

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

zbMATH Keywords

generalized gamma convolutionsLévy processesperfect samplingself-decomposable lawstime changed price processes

Mathematics Subject Classification ID

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

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.

Review text

For a positive random variable \(R\) with continuous increasing distribution function \(F\), let \(Q_R\) denote the inverse function of \(F\). Setting \[ T_R(t):=\int_{[0,t]}Q_R(1-t/s)L(ds), \;\;t\geq 0, \] where \((L(t))_{t\geq 0}\) is a subordinator, the authors investigate some properties of sample paths and the one-dimensional distributions of the process \((T_R(t))_{t\geq 0}\), which they call quantile clock. The quantile clock is an instance of a convoluted subordinator as defined by \textit{C. Bender} and \textit{T. Marquardt} [``Integrating volatility clustering into exponential Lévy models, J. Appl. Probab. 46, No. 3, 609--628 (2009; Zbl 1188.91239)]. The authors point out conditions that ensure that the sample paths of a quantile clock are continuous and increasing with probability one. They also show that, for each fixed \(t\), \(T_R(t)\) has the same law as \(X(t)\), where \((X(t))\) is a subordinator with explicitly given Lévy measure. Extending this line the authors relate the one-dimensional distribution of the composition of independent quantile clocks to those of the composition of independent subordinators. Under certain conditions on the law of \(R\) the authors demonstrate how to choose the law of \((L(t))\) in order to guarantee that \(X(t)\) has a desired law from Jurek's class \(\mathcal{U}_\delta\) of generalized \(s\)-selfdecomposable distributions. Finally, an interesting decomposition of the gamma subordinator found by the authors is worth mentioning. A number of possible applications is discussed, and many selected illustrating examples are given. For instance, one section is devoted to examples of laws of independent random variables \(R\) and \(Y\) such that \(RY\) has the beta law with parameters \(\delta\) and \(1\).

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Cited in

(9)

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