Modern Stochastics: Theory and Applications

In this article, a non-Gaussian long memory process is constructed by the aggregation of independent copies of a fractional Lévy Ornstein–Uhlenbeck process with random coefficients. Several properties and a limit theorem are studied for this new process. Finally, some simulations of the limit process are shown.

A new multi-factor short rate model is presented which is bounded from below by a real-valued function of time. The mean-reverting short rate process is modeled by a sum of pure-jump Ornstein–Uhlenbeck processes such that the related bond prices possess affine representations. Also the dynamics of the associated instantaneous forward rate is provided and a condition is derived under which the model can be market-consistently calibrated. The analytical tractability of this model is illustrated by the derivation of an explicit plain vanilla option price formula. With view on practical applications, suitable probability distributions are proposed for the driving jump processes. The paper is concluded by presenting a post-crisis extension of the proposed short and forward rate model.

This paper is devoted to investigation of supremum of averaged deviations $|X(t)-f(t)-\int _{\mathbb{T}}(X(u)-f(u))\hspace{0.1667em}\mathrm{d}\mu (u)/\mu (\mathbb{T})|$ of a stochastic process from Orlicz space of random variables using the method of majorizing measures. An estimate of distribution of supremum of deviations $|X(t)-f(t)|$ is derived. A special case of the $L_{q}$ space is considered. As an example, the obtained results are applied to stochastic processes from the $L_{2}$ space with known covariance functions.

We investigate large deviation properties of the maximum likelihood drift parameter estimator for Ornstein–Uhlenbeck process driven by mixed fractional Brownian motion.

We consider a discrete-time approximation of paths of an Ornstein–Uhlenbeck process as a mean for estimation of a price of European call option in the model of financial market with stochastic volatility. The Euler–Maruyama approximation scheme is implemented. We determine the estimates for the option price for predetermined sets of parameters. The rate of convergence of the price and an average volatility when discretization intervals tighten are determined. Discretization precision is analyzed for the case where the exact value of the price can be derived.

We consider the Black–Scholes model of financial market modified to capture the stochastic nature of volatility observed at real financial markets. For volatility driven by the Ornstein–Uhlenbeck process, we establish the existence of equivalent martingale measure in the market model. The option is priced with respect to the minimal martingale measure for the case of uncorrelated processes of volatility and asset price, and an analytic expression for the price of European call option is derived. We use the inverse Fourier transform of a characteristic function and the Gaussian property of the Ornstein–Uhlenbeck process.