A recursive pricing method for autocallables under multivariate subordination

Quantitative Finance and Economics

Kevin Z. Tong¹ 

[1] Department of Mathematics and Statistics, University of Ottawa, Ottawa, ON, Canada;

关键词: autocallables;    multivariate assets;    eigenfunction expansion;    multivariate subordination|;    stochastic time change;    OU process;    jump diffusion;   

DOI  :  10.3934/QFE.2019.3.440

来源: DOAJ

【 摘 要 】

In this paper we develop a new class of models for pricing autocallables based on multivariate subordinate Orstein Uhlenbeck (OU) processes. Starting from d independent OU processes and an independent d-dimensional Lévy subordinator, we construct a new process by time changing each of the OU processes with a coordinate of the Lévy subordinator. The prices of underlying assets are then modeled as an exponential function of the subordinate processes. The new models introduce state-dependent jumps in the asset prices and the dependence among jumps is governed by the Lévy measure of the d-dimensional subordinator. By employing the eigenfunction expansion technique, we are able to derive the analytical formulas for the worst-of autocallable prices. We also numerically implement a specific model and test its sensitivity to some of the key parameters of the model.

【 授权许可】

Unknown