We found a match
Your institution may have access to this item. Find your institution then sign in to continue.
- Title
CBI-time-changed Lévy processes for multi-currency modeling.
- Authors
Fontana, Claudio; Gnoatto, Alessandro; Szulda, Guillaume
- Abstract
We develop a stochastic volatility framework for modeling multiple currencies based on CBI-time-changed Lévy processes. The proposed framework captures the typical risk characteristics of FX markets and is coherent with the symmetries of FX rates. Moreover, due to the self-exciting behavior of CBI processes, the volatilities of FX rates exhibit self-exciting dynamics. By relying on the theory of affine processes, we show that our approach is analytically tractable and that the model structure is invariant under a suitable class of risk-neutral measures. A semi-closed pricing formula for currency options is obtained by Fourier methods. We propose two calibration methods, also by relying on deep-learning techniques, and show that a simple specification of the model can achieve a good fit to market data on a currency triangle.
- Subjects
LEVY processes; RISK premiums; FOREIGN exchange market; SEPARATION of variables; BRANCHING processes; PRICES
- Publication
Annals of Operations Research, 2024, Vol 336, Issue 1/2, p127
- ISSN
0254-5330
- Publication type
Article
- DOI
10.1007/s10479-022-04982-z