A Time Series Approach to Option Pricing by Christophe Chorro Dominique Guégan & Florian Ielpo

Author:Christophe Chorro, Dominique Guégan & Florian Ielpo
Language: eng
Format: epub
Publisher: Springer Berlin Heidelberg, Berlin, Heidelberg

and we recover once again the risk-neutral dynamics coming from the LRNVR in Proposition 3.2.2. In particular, having Proposition 3.2.3 in mind, the conditional Esscher transform is consistent with equilibrium pricing models for Gaussian residuals. In the next proposition we see that this consistency may be extended from Gaussian to general distributions.

Proposition 3.4.3 (Badescu et al. 2009)

In the framework of Sect.  3.2.3 , when the dynamics of the log-returns is given by Eq.  (3.4) where z t follows a centered distribution with variance one, the equilibrium EMM coincides with under any of the three following conditions: (1) u is linear.

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