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The αVG model for multivariate asset pricing: calibration and extension

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  • Florence Guillaume

Abstract

Luciano and Semeraro proposed a class of multivariate asset pricing models where the asset log-returns are modeled by a multivariate Brownian motion time-changed by a multivariate subordinator which consists of the weighted sum of a common and an idiosyncratic subordinator. In the original setting, Luciano and Semeraro imposed some constraints on the subordinator parameters such that the multivariate subordinator is of the same subordinator sub-class as its components, leading to asset log-returns of a particular Lévy type. This restriction leads to marginal characteristic functions which are independent on the common subordinator setting. In this paper, we propose to extend the original model by relaxing the constraints on the subordinator parameters, leading to marginal characteristic functions which become a function of the whole parameter set. Under this generalized version, the volatility of the log-returns depends on both the common and idiosyncratic subordinator settings, and not only on the idiosyncratic one, which makes the generalized model more in line with the empirical evidence of the presence of both an idiosyncratic and a common component in the business clock. For the numerical study, we compare the calibration fit of both univariate option surfaces and market implied correlations for a period extending from the 2nd of June 2008 until the 30th of October 2009 under the two model settings and assess the calibration risk arising from different calibration procedures by pricing traditional multivariate exotic options. In particular we show that the decoupling calibration procedure fails to accurately replicate the market dependence structure under the original model for highly correlated asset returns and we propose an alternative methodology which rests on a joint calibration of the univariate and the dependence structure and which leads to an accurate fit of the market reality under both the generalized and original models. Copyright Springer Science+Business Media, LLC 2013

Suggested Citation

  • Florence Guillaume, 2013. "The αVG model for multivariate asset pricing: calibration and extension," Review of Derivatives Research, Springer, vol. 16(1), pages 25-52, April.
    • Handle: RePEc:kap:revdev:v:16:y:2013:i:1:p:25-52
    DOI: 10.1007/s11147-012-9080-2
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    References listed on IDEAS

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    Cited by:

    1. Gian Luca Tassinari & Michele Leonardo Bianchi, 2014. "Calibrating The Smile With Multivariate Time-Changed Brownian Motion And The Esscher Transform," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 17(04), pages 1-34.
    2. Buchmann, Boris & Kaehler, Benjamin & Maller, Ross & Szimayer, Alexander, 2017. "Multivariate subordination using generalised Gamma convolutions with applications to Variance Gamma processes and option pricing," Stochastic Processes and their Applications, Elsevier, vol. 127(7), pages 2208-2242.
    3. Lynn Boen & Florence Guillaume, 2020. "Towards a $$\Delta $$Δ-Gamma Sato multivariate model," Review of Derivatives Research, Springer, vol. 23(1), pages 1-39, April.
    4. Boris Buchmann & Kevin W. Lu & Dilip B. Madan, 2019. "Calibration for Weak Variance-Alpha-Gamma Processes," Methodology and Computing in Applied Probability, Springer, vol. 21(4), pages 1151-1164, December.
    5. Ivanov Roman V., 2018. "On risk measuring in the variance-gamma model," Statistics & Risk Modeling, De Gruyter, vol. 35(1-2), pages 23-33, January.
    6. Michele Leonardo Bianchi & Gian Luca Tassinari & Frank J. Fabozzi, 2016. "Riding With The Four Horsemen And The Multivariate Normal Tempered Stable Model," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 19(04), pages 1-28, June.
    7. Boris Buchmann & Benjamin Kaehler & Ross Maller & Alexander Szimayer, 2015. "Multivariate Subordination using Generalised Gamma Convolutions with Applications to V.G. Processes and Option Pricing," Papers 1502.03901, arXiv.org, revised Oct 2016.
    8. Holger Fink & Stefan Mittnik, 2021. "Quanto Pricing beyond Black–Scholes," JRFM, MDPI, vol. 14(3), pages 1-27, March.
    9. Andrey Itkin & Alexander Lipton, 2014. "Efficient solution of structural default models with correlated jumps and mutual obligations," Papers 1408.6513, arXiv.org, revised Nov 2014.
    10. Hasan Fallahgoul & Gregoire Loeper, 2021. "Modelling tail risk with tempered stable distributions: an overview," Annals of Operations Research, Springer, vol. 299(1), pages 1253-1280, April.
    11. Roman V. Ivanov, 2018. "Option Pricing In The Variance-Gamma Model Under The Drift Jump," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 21(04), pages 1-19, June.
    12. Buchmann, Boris & Lu, Kevin W. & Madan, Dilip B., 2020. "Self-decomposability of weak variance generalised gamma convolutions," Stochastic Processes and their Applications, Elsevier, vol. 130(2), pages 630-655.
    13. Roman Ivanov, 2015. "The distribution of the maximum of a variance gamma process and path-dependent option pricing," Finance and Stochastics, Springer, vol. 19(4), pages 979-993, October.
    14. Patrizia Semeraro, 2021. "Multivariate tempered stable additive subordination for financial models," Papers 2105.00844, arXiv.org, revised Sep 2021.
    15. Baule, Rainer & Shkel, David, 2021. "Model risk and model choice in the case of barrier options and bonus certificates," Journal of Banking & Finance, Elsevier, vol. 133(C).
    16. Hasan A. Fallahgoul & Young S. Kim & Frank J. Fabozzi & Jiho Park, 2019. "Quanto Option Pricing with Lévy Models," Computational Economics, Springer;Society for Computational Economics, vol. 53(3), pages 1279-1308, March.
    17. Florence Guillaume, 2018. "Multivariate Option Pricing Models With Lévy And Sato Vg Marginal Processes," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 21(02), pages 1-26, March.
    18. Boris Buchmann & Kevin W. Lu & Dilip B. Madan, 2018. "Calibration for Weak Variance-Alpha-Gamma Processes," Papers 1801.08852, arXiv.org, revised Jul 2018.
    19. Patrizia Semeraro, 2022. "Multivariate tempered stable additive subordination for financial models," Mathematics and Financial Economics, Springer, volume 16, number 3, December.

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    More about this item

    Keywords

    Multivariate asset pricing; αVG model; Calibration; Calibration risk; G12; C63;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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