Exponential ergodicity of the jump-diffusion CIR process

In this paper we study the jump-diffusion CIR process (shorted as JCIR), which is an extension of the classical CIR model. The jumps of the JCIR are introduced with the help of a pure-jump L\'evy process $(J_t, t \ge 0)$. Under some suitable conditions on the L\'evy measure of $(J_t, t \ge 0)$, we derive a lower bound for the transition densities of the JCIR process. We also find some sufficient condition guaranteeing the existence of a Forster-Lyapunov function for the JCIR process, which allows us to prove its exponential ergodicity.Comment: 14 page

On multicurve models for the term structure

In the context of multi-curve modeling we consider a two-curve setup, with one curve for discounting (OIS swap curve) and one for generating future cash flows (LIBOR for a give tenor). Within this context we present an approach for the clean-valuation pricing of FRAs and CAPs (linear and nonlinear derivatives) with one of the main goals being also that of exhibiting an "adjustment factor" when passing from the one-curve to the two-curve setting. The model itself corresponds to short rate modeling where the short rate and a short rate spread are driven by affine factors; this allows for correlation between short rate and short rate spread as well as to exploit the convenient affine structure methodology. We briefly comment also on the calibration of the model parameters, including the correlation factor.Comment: 16 page

Continuous Equilibrium in Affine and Information-Based Capital Asset Pricing Models

We consider a class of generalized capital asset pricing models in continuous time with a finite number of agents and tradable securities. The securities may not be sufficient to span all sources of uncertainty. If the agents have exponential utility functions and the individual endowments are spanned by the securities, an equilibrium exists and the agents' optimal trading strategies are constant. Affine processes, and the theory of information-based asset pricing are used to model the endogenous asset price dynamics and the terminal payoff. The derived semi-explicit pricing formulae are applied to numerically analyze the impact of the agents' risk aversion on the implied volatility of simultaneously-traded European-style options.Comment: 24 pages, 4 figure

Holomorphic transforms with application to affine processes

In a rather general setting of It\^o-L\'evy processes we study a class of transforms (Fourier for example) of the state variable of a process which are holomorphic in some disc around time zero in the complex plane. We show that such transforms are related to a system of analytic vectors for the generator of the process, and we state conditions which allow for holomorphic extension of these transforms into a strip which contains the positive real axis. Based on these extensions we develop a functional series expansion of these transforms in terms of the constituents of the generator. As application, we show that for multidimensional affine It\^o-L\'evy processes with state dependent jump part the Fourier transform is holomorphic in a time strip under some stationarity conditions, and give log-affine series representations for the transform.Comment: 30 page

On small-noise equations with degenerate limiting system arising from volatility models

The one-dimensional SDE with non Lipschitz diffusion coefficient $dX_{t} = b(X_{t})dt + \sigma X_{t}^{\gamma} dB_{t}, \ X_{0}=x, \ \gamma<1$ is widely studied in mathematical finance. Several works have proposed asymptotic analysis of densities and implied volatilities in models involving instances of this equation, based on a careful implementation of saddle-point methods and (essentially) the explicit knowledge of Fourier transforms. Recent research on tail asymptotics for heat kernels [J-D. Deuschel, P.~Friz, A.~Jacquier, and S.~Violante. Marginal density expansions for diffusions and stochastic volatility, part II: Applications. 2013, arxiv:1305.6765] suggests to work with the rescaled variable $X^{\varepsilon}:=\varepsilon^{1/(1-\gamma)} X$: while allowing to turn a space asymptotic problem into a small-$\varepsilon$ problem with fixed terminal point, the process $X^{\varepsilon}$ satisfies a SDE in Wentzell--Freidlin form (i.e. with driving noise $\varepsilon dB$). We prove a pathwise large deviation principle for the process $X^{\varepsilon}$ as $\varepsilon \to 0$. As it will become clear, the limiting ODE governing the large deviations admits infinitely many solutions, a non-standard situation in the Wentzell--Freidlin theory. As for applications, the $\varepsilon$-scaling allows to derive exact log-asymptotics for path functionals of the process: while on the one hand the resulting formulae are confirmed by the CIR-CEV benchmarks, on the other hand the large deviation approach (i) applies to equations with a more general drift term and (ii) potentially opens the way to heat kernel analysis for higher-dimensional diffusions involving such an SDE as a component.Comment: 21 pages, 1 figur

Analysis of Fourier transform valuation formulas and applications

The aim of this article is to provide a systematic analysis of the conditions such that Fourier transform valuation formulas are valid in a general framework; i.e. when the option has an arbitrary payoff function and depends on the path of the asset price process. An interplay between the conditions on the payoff function and the process arises naturally. We also extend these results to the multi-dimensional case, and discuss the calculation of Greeks by Fourier transform methods. As an application, we price options on the minimum of two assets in L\'evy and stochastic volatility models.Comment: 26 pages, 3 figures, to appear in Appl. Math. Financ