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Consistent asset modelling with random coefficients and switches between regimes.

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Title: Consistent asset modelling with random coefficients and switches between regimes.
Authors: Wolf, Felix L.1 (AUTHOR) Felix.Wolf@ulb.be, Deelstra, Griselda1 (AUTHOR) Griselda.Deelstra@ulb.be, Grzelak, Lech A.2,3 (AUTHOR) L.A.Grzelak@uu.nl
Source: Mathematics & Computers in Simulation. Sep2024, Vol. 223, p65-85. 21p.
Subjects: Characteristic functions, Stochastic models, Prices
Abstract: We explore a stochastic model that enables capturing external influences in two specific ways. The model allows for the expression of uncertainty in the parametrisation of the stochastic dynamics and incorporates patterns to account for different behaviours across various times or regimes. To establish our framework, we initially construct a model with random parameters, where the switching between regimes can be dictated either by random variables or deterministically. Such a model is highly interpretable. We further ensure mathematical consistency by demonstrating that the framework can be elegantly expressed through local volatility models taking the form of standard jump diffusions. Additionally, we consider a Markov-modulated approach for the switching between regimes characterised by random parameters. For all considered models, we derive characteristic functions, providing a versatile tool with wide-ranging applications. In a numerical experiment, we apply the framework to the financial problem of option pricing. The impact of parameter uncertainty is analysed in a two-regime model, where the asset process switches between periods of high and low volatility imbued with high and low uncertainty, respectively. [ABSTRACT FROM AUTHOR]
Copyright of Mathematics & Computers in Simulation is the property of Elsevier B.V. and its content may not be copied or emailed to multiple sites without the copyright holder's express written permission. Additionally, content may not be used with any artificial intelligence tools or machine learning technologies. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)
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  Data: <searchLink fieldCode="JN" term="%22Mathematics+%26+Computers+in+Simulation%22">Mathematics & Computers in Simulation</searchLink>. Sep2024, Vol. 223, p65-85. 21p.
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  Data: We explore a stochastic model that enables capturing external influences in two specific ways. The model allows for the expression of uncertainty in the parametrisation of the stochastic dynamics and incorporates patterns to account for different behaviours across various times or regimes. To establish our framework, we initially construct a model with random parameters, where the switching between regimes can be dictated either by random variables or deterministically. Such a model is highly interpretable. We further ensure mathematical consistency by demonstrating that the framework can be elegantly expressed through local volatility models taking the form of standard jump diffusions. Additionally, we consider a Markov-modulated approach for the switching between regimes characterised by random parameters. For all considered models, we derive characteristic functions, providing a versatile tool with wide-ranging applications. In a numerical experiment, we apply the framework to the financial problem of option pricing. The impact of parameter uncertainty is analysed in a two-regime model, where the asset process switches between periods of high and low volatility imbued with high and low uncertainty, respectively. [ABSTRACT FROM AUTHOR]
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  Data: <i>Copyright of Mathematics & Computers in Simulation is the property of Elsevier B.V. and its content may not be copied or emailed to multiple sites without the copyright holder's express written permission. Additionally, content may not be used with any artificial intelligence tools or machine learning technologies. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract.</i> (Copyright applies to all Abstracts.)
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RecordInfo BibRecord:
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      – Type: doi
        Value: 10.1016/j.matcom.2024.03.021
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      – Code: eng
        Text: English
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        PageCount: 21
        StartPage: 65
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      – SubjectFull: Characteristic functions
        Type: general
      – SubjectFull: Stochastic models
        Type: general
      – SubjectFull: Prices
        Type: general
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      – TitleFull: Consistent asset modelling with random coefficients and switches between regimes.
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              M: 09
              Text: Sep2024
              Type: published
              Y: 2024
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              Value: 223
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