{"title":"A Family of Density Expansions for Lévy-Type Processes","authors":"Matthew J. Lorig, S. Pagliarani, A. Pascucci","doi":"10.2139/ssrn.2245118","DOIUrl":null,"url":null,"abstract":"We consider a defaultable asset whose risk-neutral pricing dynamics are described by an exponential Levy-type martingale subject to default. This class of models allows for local volatility, local default intensity, and a locally dependent Levy measure. Generalizing and extending the novel adjoint expansion technique of Pagliarani, Pascucci, and Riga (2013), we derive a family of asymptotic expansions for the transition density of the underlying as well as for European-style option prices and defaultable bond prices. For the density expansion, we also provide error bounds for the truncated asymptotic series. Our method is numerically efficient; approximate transition densities and European option prices are computed via Fourier transforms; approximate bond prices are computed as finite series. Additionally, as in Pagliarani et al. (2013), for models with Gaussian-type jumps, approximate option prices can be computed in closed form. Sample Mathematica code is provided.","PeriodicalId":365755,"journal":{"name":"ERN: Other Econometrics: Mathematical Methods & Programming (Topic)","volume":"16 1","pages":"0"},"PeriodicalIF":0.0000,"publicationDate":"2013-12-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"28","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"ERN: Other Econometrics: Mathematical Methods & Programming (Topic)","FirstCategoryId":"1085","ListUrlMain":"https://doi.org/10.2139/ssrn.2245118","RegionNum":0,"RegionCategory":null,"ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"","JCRName":"","Score":null,"Total":0}
引用次数: 28
Abstract
We consider a defaultable asset whose risk-neutral pricing dynamics are described by an exponential Levy-type martingale subject to default. This class of models allows for local volatility, local default intensity, and a locally dependent Levy measure. Generalizing and extending the novel adjoint expansion technique of Pagliarani, Pascucci, and Riga (2013), we derive a family of asymptotic expansions for the transition density of the underlying as well as for European-style option prices and defaultable bond prices. For the density expansion, we also provide error bounds for the truncated asymptotic series. Our method is numerically efficient; approximate transition densities and European option prices are computed via Fourier transforms; approximate bond prices are computed as finite series. Additionally, as in Pagliarani et al. (2013), for models with Gaussian-type jumps, approximate option prices can be computed in closed form. Sample Mathematica code is provided.