A Multivariate Jump-Driven Financial Asset Model

In: Quantitative Finance, Band 6, Heft 5, S. 385-402

Abstract

We discuss a Lévy multivariate model for financial assets which incorporates jumps, skewness, kurtosis and stochastic volatility. We use it to describe the
behavior of a series of stocks or indexes and to study a multi-firm, value-based default model.

Starting from an independent Brownian world, we introduce jumps and other deviations from normality, including non-Gaussian dependence. We use a stochastic time-change technique and provide the details for a Gamma change.

The main feature of the model is the fact that - opposite to other, non jointly Gaussian settings - its risk neutral dependence can be calibrated from univariate derivative prices, providing a surprisingly good fit.