Skip to main content

Lund University Publications

LUND UNIVERSITY LIBRARIES

Derivative Prices for Models using Levy Processes and Markov Switching

Rasmus, Sebastian LU (2006)
Abstract
This thesis contributes to mathematics, finance and computer simulations. In terms of mathematics this thesis concerns applied probability and Lévy processes and from the financial point of view the thesis concerns derivative pricing. Within these two areas several simulation techniques are investigated.



The thesis is organized as follows. The first two chapters are to be considered as reviews on derivative pricing (Chapter 1) and Lévy processes (Chapter 2). Chapter 3 concerns simulation techniques for general Lévy process and the techniques are implemented and evaluated for the normal inverse Gaussian ( extsf{NIG}) Lévy process. The first algorithm deals with the generation of sample paths of a Lévy process. The idea... (More)
This thesis contributes to mathematics, finance and computer simulations. In terms of mathematics this thesis concerns applied probability and Lévy processes and from the financial point of view the thesis concerns derivative pricing. Within these two areas several simulation techniques are investigated.



The thesis is organized as follows. The first two chapters are to be considered as reviews on derivative pricing (Chapter 1) and Lévy processes (Chapter 2). Chapter 3 concerns simulation techniques for general Lévy process and the techniques are implemented and evaluated for the normal inverse Gaussian ( extsf{NIG}) Lévy process. The first algorithm deals with the generation of sample paths of a Lévy process. The idea behind the algorithm has been known for a while, but has been theoretically motivated in the resent paper Asmussen and Rosinski (2001). Then two variance reduction techniques are considered. The first is importance sampling for the barrier option and the second is stratification for subordinated Brownian motion.



Chapter 4 considers asymptotics for derivative prices as the maturity$T oinfty$. The motivation for this investigation is that the implied volatility smile in most theoretical markets tend to fade out as the maturity grows. This can be interpreted as the prices converge to the price in the Black & Scholes market as $T oinfty$. For some derivatives we are able to show that this actually is the case. We further find that for other derivatives the prices diverge from the price in the Black & Scholes market. These results are tested in the extsf{NIG} market, where we can quantify the divergence and convergence.



The final Chapter 5 considers financial markets based on Markov modulated Lévy processes. That is, the parameters in the Lévy process change according to a finite state Markov jump process. This is also often called regime switching markets or hidden Markov markets and the most common choice is the regime switching Brownian motion. In this thesis the arbitrage theory for a general regime switching Lévy market is developed. The chapter also contain several pricing algorithms for different derivatives and it ends with a section that investigate the volatility smile in these markets. (Less)
Abstract (Swedish)
Popular Abstract in Swedish

Denna avhandling behandlar matematik, finans och dator simuleringar. I matematiska termer handlar den om tillämpad sannolikhetsteori och från ett finansiellt perspektiv handlar den om derivatprissättning.



Avhandlingen är organiserad som följer. De två första kapitlen presenterar derivatprissättning och levy processer. Kapitel 3 beskriver och undersöker en simulerings metod för sample vägar av Levy processer. Dessutom behandlar kapitel 3 två stycken variansreduktions metoder för Levy processer.



Kapitel 4 studerar asymptotik för derivatpriser för långa löptider. Slutsatsen är att för många derivat och marknader kommer priserna konvergera mot samma priser som i... (More)
Popular Abstract in Swedish

Denna avhandling behandlar matematik, finans och dator simuleringar. I matematiska termer handlar den om tillämpad sannolikhetsteori och från ett finansiellt perspektiv handlar den om derivatprissättning.



Avhandlingen är organiserad som följer. De två första kapitlen presenterar derivatprissättning och levy processer. Kapitel 3 beskriver och undersöker en simulerings metod för sample vägar av Levy processer. Dessutom behandlar kapitel 3 två stycken variansreduktions metoder för Levy processer.



Kapitel 4 studerar asymptotik för derivatpriser för långa löptider. Slutsatsen är att för många derivat och marknader kommer priserna konvergera mot samma priser som i den klassiska Black och Scholes marknaden. Även motexempel presenteras.



Slutligen behandlar kapitel 5 derivatprissättning i Levy marknader med en gömd Markov process. Arbitrage teorin för dessa marknader härleds och sedan görs vissa undersökningar på derivatpriser som kopplas till kapitel 4. (Less)
Please use this url to cite or link to this publication:
author
supervisor
opponent
  • Prof. Pistorius, Martijn, Dept of Mathematics, King
organization
publishing date
type
Thesis
publication status
published
subject
keywords
programming, operations research, Statistics, Regime switching, Levy processes, Derivative pricing, Computer simulations, actuarial mathematics, Statistik, operationsanalys, programmering, aktuariematematik
pages
218 pages
publisher
Mathematical Statistics, Centre for Mathematical Sciences, Lund University
defense location
MH:A, Centre for Mathematical Sciences, Sölvegatan 18, Lund
defense date
2006-10-20 09:15:00
ISBN
91-628-6946-9
language
English
LU publication?
yes
id
fd8801e9-6d2d-4c63-af27-f9d0f1b7c06f (old id 25704)
date added to LUP
2016-04-01 17:08:51
date last changed
2018-11-21 20:47:01
@phdthesis{fd8801e9-6d2d-4c63-af27-f9d0f1b7c06f,
  abstract     = {This thesis contributes to mathematics, finance and computer simulations. In terms of mathematics this thesis concerns applied probability and Lévy processes and from the financial point of view the thesis concerns derivative pricing. Within these two areas several simulation techniques are investigated.<br/><br>
<br/><br>
The thesis is organized as follows. The first two chapters are to be considered as reviews on derivative pricing (Chapter 1) and Lévy processes (Chapter 2). Chapter 3 concerns simulation techniques for general Lévy process and the techniques are implemented and evaluated for the normal inverse Gaussian (	extsf{NIG}) Lévy process. The first algorithm deals with the generation of sample paths of a Lévy process. The idea behind the algorithm has been known for a while, but has been theoretically motivated in the resent paper Asmussen and Rosinski (2001). Then two variance reduction techniques are considered. The first is importance sampling for the barrier option and the second is stratification for subordinated Brownian motion.<br/><br>
<br/><br>
Chapter 4 considers asymptotics for derivative prices as the maturity$T	oinfty$. The motivation for this investigation is that the implied volatility smile in most theoretical markets tend to fade out as the maturity grows. This can be interpreted as the prices converge to the price in the Black &amp; Scholes market as $T	oinfty$. For some derivatives we are able to show that this actually is the case. We further find that for other derivatives the prices diverge from the price in the Black &amp; Scholes market. These results are tested in the extsf{NIG} market, where we can quantify the divergence and convergence.<br/><br>
<br/><br>
The final Chapter 5 considers financial markets based on Markov modulated Lévy processes. That is, the parameters in the Lévy process change according to a finite state Markov jump process. This is also often called regime switching markets or hidden Markov markets and the most common choice is the regime switching Brownian motion. In this thesis the arbitrage theory for a general regime switching Lévy market is developed. The chapter also contain several pricing algorithms for different derivatives and it ends with a section that investigate the volatility smile in these markets.},
  author       = {Rasmus, Sebastian},
  isbn         = {91-628-6946-9},
  language     = {eng},
  publisher    = {Mathematical Statistics, Centre for Mathematical Sciences, Lund University},
  school       = {Lund University},
  title        = {Derivative Prices for Models using Levy Processes and Markov Switching},
  year         = {2006},
}