Option Pricing with Levy-Stable Processes Generated by Levy-Stable Integrated Variance
Quantitative Finance Vol. 9, No. 4, June 2009, pp 397–409
30 Pages Posted: 2 Oct 2007 Last revised: 11 Mar 2013
Date Written: September 1, 2007
Abstract
We show how to calculate European-style option prices when the log-stock price process follows a Lévy-Stable process with index parameter 1_< alpha _< 2 and skewness parameter 1_< beta _< 2. Key to our result is to model integrated variance integral from t to T of sigma^2 as an increasing Lévy-Stable process with continuous paths in T.
Keywords: stable processes, Lévy, jumps, implied volatility, jumps
JEL Classification: G12, C00, G13
Suggested Citation: Suggested Citation
Cartea, Álvaro and Howison, Sam, Option Pricing with Levy-Stable Processes Generated by Levy-Stable Integrated Variance (September 1, 2007). Quantitative Finance Vol. 9, No. 4, June 2009, pp 397–409, Available at SSRN: https://ssrn.com/abstract=1018092
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