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CTM and Multifactor Lévy Models for Pricing Financial and Energy Derivatives

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Change of Time Methods in Quantitative Finance

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Abstract

In this chapter, the CTM is applied to price financial and energy derivatives for one-factor and multifactor α-stable Lévy-based models. These models include, in particular, as one-factor models, the Lévy-based geometric motion model and the Ornstein and Uhlenbeck (1930), the Vasicek (1977), the Cox et al. (1985), the continuous-time GARCH, the Ho and Lee (1986), the Hull and White (1990), and the Heath et al. (1992) models and, as multifactor models, various combinations of the previous models. For example, we introduce new multifactor models such as the Lévy-based Heston model, the Lévy-based SABR/LIBOR market models, and Lévy-based Schwartz-Smith and Schwartz models. Using the change of time method for SDEs driven by α-stable Lévy processes, we present the solutions of these equations in simple and compact forms. We then apply this method to price many financial and energy derivatives such as variance swaps, options, forward, and futures contracts.

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  1. Department of Mathematics and Statistics, University of Calgary, Calgary, AB, Canada

    Anatoliy Swishchuk

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Swishchuk, A. (2016). CTM and Multifactor Lévy Models for Pricing Financial and Energy Derivatives. In: Change of Time Methods in Quantitative Finance. SpringerBriefs in Mathematics. Springer, Cham. https://doi.org/10.1007/978-3-319-32408-1_8

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