Journal article
Option Pricing with Threshold Diffusion Processes
North American Actuarial Journal, Vol.20(2), pp.133-141
04/02/2016
DOI: 10.1080/10920277.2015.1106953
Abstract
The threshold diffusion (TD) model assumes a piecewise linear drift term and piecewise smooth diffusion term, which can capture many nonlinear features and volatility clustering often observed in financial time series data. We solve the problem of option pricing with a TD asset pricing process by deriving the minimum entropy martingale measure, which is the risk-neutral measure closest to the underlying TD probability measure in terms of Kullback-Leibler divergence, given the historical regime-switching pattern. The proposed valuation model is illustrated with a numerical example.
Details
- Title: Subtitle
- Option Pricing with Threshold Diffusion Processes
- Creators
- Fei Su - Verisk Innovative AnalyticsKung-Sik Chan - Department of Statistics and Actuarial Science, University of Iowa
- Resource Type
- Journal article
- Publication Details
- North American Actuarial Journal, Vol.20(2), pp.133-141
- Publisher
- Routledge
- DOI
- 10.1080/10920277.2015.1106953
- ISSN
- 1092-0277
- eISSN
- 2325-0453
- Language
- English
- Date published
- 04/02/2016
- Academic Unit
- Statistics and Actuarial Science; Radiology
- Record Identifier
- 9983985833402771
Metrics
14 Record Views