Financial Models with Levy Processes and Volatility Clustering

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John Wiley & Sons, Feb 8, 2011 - Business & Economics - 400 pages
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An in-depth guide to understanding probability distributions and financial modeling for the purposes of investment management

In Financial Models with Lévy Processes and Volatility Clustering, the expert author team provides a framework to model the behavior of stock returns in both a univariate and a multivariate setting, providing you with practical applications to option pricing and portfolio management. They also explain the reasons for working with non-normal distribution in financial modeling and the best methodologies for employing it.

The book's framework includes the basics of probability distributions and explains the alpha-stable distribution and the tempered stable distribution. The authors also explore discrete time option pricing models, beginning with the classical normal model with volatility clustering to more recent models that consider both volatility clustering and heavy tails.

  • Reviews the basics of probability distributions
  • Analyzes a continuous time option pricing model (the so-called exponential Lévy model)
  • Defines a discrete time model with volatility clustering and how to price options using Monte Carlo methods
  • Studies two multivariate settings that are suitable to explain joint extreme events

Financial Models with Lévy Processes and Volatility Clustering is a thorough guide to classical probability distribution methods and brand new methodologies for financial modeling.


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Probability Distributions
Stable and Tempered StableDistributions
Stochastic Processes in Continuous
Conditional Expectation and Change
Exponential Lévy model
MultiTail tDistribution
Normal GARCHModels
Smoothly Truncated Stable GARCH
Infinitely Divisible GARCHModels 13 1Stock Price Dynamic
Option Pricing with Monte Carlo
AmericanOption Pricing with Monte Carlo Methods

Divisible Processes

Common terms and phrases

About the author (2011)

SVETLOZAR T. RACHEV is Chair-Professor in Statistics, Econometrics, and Mathematical Finance at the Karlsruhe Institute of Technology (KIT) in the School of Economics and Business Engineering; Professor Emeritus at the University of California, Santa Barbara; and Chief Scientist at FinAnalytica Inc.

YOUNG SHIN KIM is a scientific assistant in the Department of Statistics, Econometrics, and Mathematical Finance at the Karlsruhe Institute of Technology (KIT).

MICHELE Leonardo BIANCHI is an analyst in the Division of Risk and Financial Innovation Analysis at the Specialized Intermediaries Supervision Department of the Bank of Italy.

FRANK J. FABOZZI is Professor in the Practice of Finance and Becton Fellow at the Yale School of Management and Editor of the Journal of PortfolioManagement. He is an Affiliated Professor at the University of Karlsruhe's Institute of Statistics, Econometrics, and Mathematical Finance and serves on the Advisory Council for the Department of Operations Research and Financial Engineering at Princeton University.

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