CMU Campus
 Faculty in  Mathematical  Finance            
Math Finance Home Conferences Seminars People Open Positions Contact

Probability and Math Finance Seminar

Sergey Nadtochiy, Princeton University

Market Models For European Options: Dynamic Local Volatility and Dynamic Local Levy Measure, (Joint With Ren´E Carmona)

Abstract: Most financial models introduced for the purpose of pricing and hedging derivatives concentrate on the dynamics of the underlying stocks, or underlying instruments on which the derivatives are written. However, as certain types of derivatives became liquid, it appeared reasonable to model their prices directly and use these market models to price or hedge exotic derivatives. This framework was originally advocated by Heath, Jarrow and Morton for the Treasury bond markets. We discuss the characterization of arbitrage free dynamic stochastic models for the markets with infinite number of European Call options as the liquid derivatives. Subject to our assumptions on the presence of jumps in the underlying, the option prices are represented either through local volatility or through local Levy measure. Each of the latter ones is then given dynamics through an Ito stochastic process in a Banach space. The main thrust of our work is to characterize absence of arbitrage in this framework and address the issue of construction of the arbitrage free models.

MONDAY, January 26, 2009
Time: 5:00 P.M.
Location: WeH 6423