Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/239083 
Year of Publication: 
2019
Citation: 
[Journal:] Journal of Risk and Financial Management [ISSN:] 1911-8074 [Volume:] 12 [Issue:] 4 [Publisher:] MDPI [Place:] Basel [Year:] 2019 [Pages:] 121-
Publisher: 
MDPI, Basel
Abstract: 
This paper proposes and investigates a multivariate 4/2 Factor Model. The name 4/2 comes from the superposition of a CIR term and a 3/2-model component. Our model goes multidimensional along the lines of a principal component and factor covariance decomposition. We find conditions for well-defined changes of measure and we also find two key characteristic functions in closed-form, which help with pricing and risk measure calculations. In a numerical example, we demonstrate the significant impact of the newly added 3/2 component (parameter b) and the common factor (a), both with respect to changes on the implied volatility surface (up to 100%) and on two risk measures: value at risk and expected shortfall where an increase of up to 29% was detected.
Subjects: 
risk measures
option pricing
4/2 model
stochastic covariance
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.