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Pricing of mountain range derivatives under a principal component stochastic volatility model
Author(s) -
Escobar Marcos,
Olivares Pablo
Publication year - 2012
Publication title -
applied stochastic models in business and industry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.413
H-Index - 40
eISSN - 1526-4025
pISSN - 1524-1904
DOI - 10.1002/asmb.936
Subject(s) - stylized fact , stochastic volatility , econometrics , volatility (finance) , principal component analysis , volatility smile , economics , implied volatility , range (aeronautics) , sabr volatility model , stochastic modelling , stochastic process , mathematics , computer science , financial economics , mathematical economics , statistics , finance , engineering , keynesian economics , aerospace engineering
In this paper, a multidimensional stochastic volatility process is introduced. This process is simpler than existing ones in terms of number of parameters while keeping practical stylized facts like stochastic correlation and volatility. The pricing of two mountain range derivatives, Altavista and Everest, is analyzed under this framework, showing sensitivities to parameters, number of eigenvalues, and maturity time. Copyright © 2012 John Wiley & Sons, Ltd.