Marc Yor

Dilip B. Madan

The logarithm of SPX is modeled as a Sato process running at a speed proportional to the current level of the VIX. When the logarithm of the VIX is an exponential compound Poisson process with drift one may obtain exact expressions for the prices of equity options taken at an independent exponential maturity. The parameters for the Lévy process are calibrated from VIX options while the parameters for the Sato process driving the stock may be calibrated from market option prices taken at an independent exponential maturity. Results confirm that both the option surface and the VIX time changed Sato process volatilities, skews and term volatility spreads are responsive to the VIX level and the VIX option surface.

The S&P 500 Index as a Sato Process Travelling at the Speed of the VIX.

Wim Schoutens

Explore how market valuation must abandon linearity to deliver efficient resource allocation.

Nonlinear Valuation and Non-Gaussian Risks in Finance

What happens to risk as the economic horizon goes to zero and risk is seen as an exposure to a change in state that may occur instantaneously at any time? All activities that have been undertaken statically at a fixed finite horizon can now be reconsidered dynamically at a zero time horizon, with arrival rates at the core of the modeling. This book, aimed at practitioners and researchers in financial risk, delivers the theoretical framework and various applications of the newly established dynamic conic finance theory. The result is a nonlinear non-Gaussian valuation framework for risk management in finance. Risk-free assets disappear and low risk portfolios must pay for their risk reduction with negative expected returns. Hedges may be constructed to enhance value by exploiting risk interactions. Dynamic trading mechanisms are synthesized by machine learning algorithms. Optimal exposures are designed for option positioning simultaneously across all strikes and maturities.

Dilip B. Madan

Books

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