Numerical Method for Highly Non-linear Mean-reverting Asset Price Model with CEV-type Process
It is well documented from various empirical studies that the volatility process of an asset price dynamics is stochastic. This phenomenon called for a new approach to describing the random evolution of volatility through time with stochastic models. In this paper, we propose a mean-reverting theta-rho model for asset price dynamics where the volatility diffusion factor of this model follows a highly non-linear CEV-type process. Since this model lacks a closed-form formula, we construct a new truncated EM method to study it numerically under the Khasminskii-type condition. We justify that the truncated EM solutions can be used to evaluate a path-dependent financial product.
Code (0)
등록된 구현이 없습니다.
Methods 이 논문이 사용한 방법론
Similar Papers 제목 키워드 기반
Mean Reverting Portfolios via Penalized OU-Likelihood Estimation
We study an optimization-based approach to con- struct a mean-reverting portfolio of assets. Our objectives are threefold: (1) design a portfolio that is well-represented by an Ornstein-Uhlenbeck process with parameters …
Optimal Risk-Averse Timing of an Asset Sale: Trending vs Mean-Reverting Price Dynamics
This paper studies the optimal risk-averse timing to sell a risky asset. The investor's risk preference is described by the exponential, power, or log utility. Two stochastic models are considered for the asset price -- …
Hermite Polynomial-based Valuation of American Options with General Jump-Diffusion Processes
We present a new approximation scheme for the price and exercise policy of American options. The scheme is based on Hermite polynomial expansions of the transition density of the underlying asset dynamics and the early e…
Mean-Reverting Portfolio Design with Budget Constraint
This paper considers the mean-reverting portfolio design problem arising from statistical arbitrage in the financial markets. We first propose a general problem formulation aimed at finding a portfolio of underlying comp…
Mean-Reverting Portfolios: Tradeoffs Between Sparsity and Volatility
Mean-reverting assets are one of the holy grails of financial markets: if such assets existed, they would provide trivially profitable investment strategies for any investor able to trade them, thanks to the knowledge th…