Time Changes, Lévy Jumps and Asset Returns

57 Pages Posted: 12 Feb 2019

See all articles by Hasan Fallahgoul

Hasan Fallahgoul

Monash University

Julien Hugonnier

Swiss Federal Institute of Technology Lausanne - Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Loriano Mancini

USI Lugano - Institute of Finance; Swiss Finance Institute

Date Written: January 25, 2019

Abstract

We provide an extensive time series and option pricing analysis of a novel class of time-changed Lévy models. To operationalize the models, we develop a simple and rigorous filtering procedure. Absence of arbitrage turns out to require a drift condition not appeared in the literature. An empirical analysis of 16 time-changed Lévy models shows that infinite activity processes carry significant risk premia and largely outperform many finite activity processes.

Keywords: Lévy jumps, time changes, tempered stable law, time series, option pricing

JEL Classification: C5, G12

Suggested Citation

Fallahgoul, Hasan A and Hugonnier, Julien and Mancini, Loriano, Time Changes, Lévy Jumps and Asset Returns (January 25, 2019). Available at SSRN: https://ssrn.com/abstract=3327137 or http://dx.doi.org/10.2139/ssrn.3327137

Hasan A Fallahgoul

Monash University ( email )

Clayton Campus
Victoria, 3800
Australia

HOME PAGE: http://www.hfallahgoul.com

Julien Hugonnier

Swiss Federal Institute of Technology Lausanne - Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL Dorigny
Extranef
Lausanne, CH-1015
Switzerland

HOME PAGE: http://sfi.epfl.ch/hugonnier

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Loriano Mancini (Contact Author)

USI Lugano - Institute of Finance ( email )

Via Giuseppe Buffi 6
6904 Lugano, CH-6904
Switzerland
+41 (0)91 912 46 47 (Fax)

HOME PAGE: http://www.people.usi.ch/mancil/

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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