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Option pricing with Lévy-Stable processes generated by Lévy-Stable integrated variance

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URI: https://hdl.handle.net/10016/12059
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option_cartea_2009.pdf (221.59 KB)
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2009-01-13
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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≤α≤2 and skewness parameter -1≤β≤1. Key to our result is to model integrated variance as an increasing Lévy-Stable process with continuous paths in Τ
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Lévy-Stable processes, Stable Paretian hypothesis, Stochastic volatility, α-stable processes, Option pricing, Time-changed Brownian motion
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