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The 3/2 Model As A Stochastic Volatility Approximation For A Large-Basket Price-Weighted Index
Radcliffe Observ Quarter, Math Inst, Oxford OX2 6GG, England..
Uppsala universitet, Teknisk-naturvetenskapliga vetenskapsområdet, Matematisk-datavetenskapliga sektionen, Matematiska institutionen.
2015 (engelsk)Inngår i: International Journal of Theoretical and Applied Finance, ISSN 0219-0249, Vol. 18, nr 6, artikkel-id 1550041Artikkel i tidsskrift (Fagfellevurdert) Published
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Abstract [en]

We derive large-basket approximations of a price-weighted index whose component prices follow a single sector jump-diffusion model. As the basket size approaches infinity, a suitable average converges to a Black-Scholes model driven by the common factor process. We extend this by considering the behavior of the residual idiosyncratic noise and show that a version of the 3/2 model emerges as a natural stochastic volatility model approximation. This provides a theoretical justification for its use as a model for jointly pricing index and volatility derivatives.

sted, utgiver, år, opplag, sider
2015. Vol. 18, nr 6, artikkel-id 1550041
Emneord [en]
Index models, stochastic volatility models, large portfolio limit, diffusion approximation, volatility derivatives
HSV kategori
Identifikatorer
URN: urn:nbn:se:uu:diva-271056DOI: 10.1142/S0219024915500417ISI: 000365773200006OAI: oai:DiVA.org:uu-271056DiVA, id: diva2:891078
Tilgjengelig fra: 2016-01-05 Laget: 2016-01-05 Sist oppdatert: 2017-12-01bibliografisk kontrollert

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