Change of Time Methods in Quantitative Finance

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Springer, May 31, 2016 - Mathematics - 128 pages

This book is devoted to the history of Change of Time Methods (CTM), the connections of CTM to stochastic volatilities and finance, fundamental aspects of the theory of CTM, basic concepts, and its properties. An emphasis is given on many applications of CTM in financial and energy markets, and the presented numerical examples are based on real data. The change of time method is applied to derive the well-known Black-Scholes formula for European call options, and to derive an explicit option pricing formula for a European call option for a mean-reverting model for commodity prices. Explicit formulas are also derived for variance and volatility swaps for financial markets with a stochastic volatility following a classical and delayed Heston model. The CTM is applied to price financial and energy derivatives for one-factor and multi-factor alpha-stable Levy-based models.

Readers should have a basic knowledge of probability and statistics, and some familiarity with stochastic processes, such as Brownian motion, Levy process and martingale.

 

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Contents

History Finance and Stochastic Volatility
1
Definitions and Theory
12
3 Applications of the Change of Time Methods
23
4 Change of Time Method CTM and BlackScholes Formula
33
5 CTM and Variance Volatility and Covariance and Correlation Swaps for the Classical Heston Model
41
Pricing and Hedging of Variance and Volatility Swaps
59
7 CTM and the Explicit Option Pricing Formula for a MeanReverting Asset in Energy Markets
88
8 CTM and Multifactor LÚvy Models for Pricing Financial and Energy Derivatives
107
Epilogue
125
Index
126
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