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Article
Joint Characteristic Function of Stock Log-Price and Squared Volatility in the Bates Model and Its Asset Pricing Applications
Theoretical Economics Letters
Document Type
Article
Disciplines
Publication Version
Published Version
Publication Date
1-1-2012
DOI
10.4236/tel.2012.24074
Abstract
The model of Bates specifies a rich, flexible structure of stock dynamics suitable for applications in finance and eco- nomics, including valuation of derivative securities. This paper analytically derives a closed-form expression for the joint conditional characteristic function of a stock’s log-price and squared volatility under the model dynamics. The use of the function, based on inverting it, is illustrated on examples of pricing European-, Bermudan-, and American-style options. The discussed approach for European-style derivatives improves on the option formula of Bates. The suggested approach for American-style derivatives, based on a compound-option technique, offers an alternative solution to exist- ing finite-difference methods
Rights
This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
Copyright Owner
Scientific Research Publishing Inc.
Copyright Date
2012
Language
en
File Format
application/pdf
Citation Information
Oleksandr Zhylyevskyy. "Joint Characteristic Function of Stock Log-Price and Squared Volatility in the Bates Model and Its Asset Pricing Applications" Theoretical Economics Letters Vol. 2 Iss. 4 (2012) p. 400 - 407 Available at: http://works.bepress.com/oleksandr-zhylyevskyy/6/
This is an article from Theoretical Economics Letters 2 (2012): 400, doi:10.4236/tel.2012.24074. Posted with permission.