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Title: A Multivariate Lévy Process Model with Linear Correlation
Authors: Kawai, Reiichiro
First Published: Aug-2009
Publisher: Taylor & Francis
Citation: Quantitative Finance, 2009, 9 (5), pp. 597-606.
Abstract: In this paper, we develop a multivariate risk-neutral Lévy process model and discuss its applicability in the context of the volatility smile of multiple assets. Our formulation is based upon a linear combination of independent univariate Lévy processes and can easily be calibrated to a set of one-dimensional marginal distributions and a given linear correlation matrix. We derive conditions for our formulation and the associated calibration procedure to be well defined and provide some examples associated with particular Lévy processes permitting closed form characteristic function. Numerical results of the option premiums on three currencies are presented to illustrate the effectiveness of our formulation with different linear correlation structures.
DOI Link: 10.1080/14697680902744729
ISSN: 1469-7688
Type: Article
Rights: This is the author's final draft of the paper published as Quantitative Finance, 2009, 9 (5), pp. 597-606. The final version is available from Doi: 10.1080/14697680902744729
Appears in Collections:Published Articles, Dept. of Mathematics

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