Adjusting exponential lévy models toward the simultaneous calibration of market prices for crash cliquets

Peter Carr, Ajay Khanna, Dilip B. Madan

Research output: Contribution to journalArticlepeer-review

Abstract

In this paper, option-calibrated exponential Lévy models are observed to typically overprice crash cliquets. Typical model Lévy tails are then not crash-market consistent. A general tail-thinning strategy is introduced that may be implemented on a class of parametric Lévy models closed under exponential tilting. Implementation on the Carr-Geman-Madan-Yor (CGMY) model leads to the CGAKMY model with a thinning function of (1 + A|x|)−K. It is observed that this model adjustment can be crashmarket consistent.

Original languageEnglish (US)
Pages (from-to)89-111
Number of pages23
JournalJournal of Computational Finance
Volume20
Issue number1
DOIs
StatePublished - Sep 2016

Keywords

  • Beta exposure pricing
  • CGMY model
  • Completely monotone function
  • Gap risk pricing
  • Gauss Laguerre quadrature
  • Negative binomial process

ASJC Scopus subject areas

  • Finance
  • Computer Science Applications
  • Applied Mathematics

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