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A Multivariate Lévy Process Model with Linear Correlation

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journal contribution
posted on 2010-06-09, 12:44 authored by Reiichiro Kawai
In this paper, we develop a multivariate risk-neutral Lévy process model and discuss its applicability in the context of the volatility smile of multiple assets. Our formulation is based upon a linear combination of independent univariate Lévy processes and can easily be calibrated to a set of one-dimensional marginal distributions and a given linear correlation matrix. We derive conditions for our formulation and the associated calibration procedure to be well defined and provide some examples associated with particular Lévy processes permitting closed form characteristic function. Numerical results of the option premiums on three currencies are presented to illustrate the effectiveness of our formulation with different linear correlation structures.

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Citation

Quantitative Finance, 2009, 9 (5), pp. 597-606.

Published in

Quantitative Finance

Publisher

Taylor & Francis

issn

1469-7688

Copyright date

2009

Available date

2010-06-09

Publisher version

http://www.tandfonline.com/doi/abs/10.1080/14697680902744729

Language

en

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