Finite Mixture Approximation of CARMA(p,q) Models

2020/05/20 by Mercuri, Lorenzo, Perchiazzo, Andrea, Rroji, Edit
#Computational Finance (q-fin.CP) #FOS: Economics and business

paper · doi:10.48550/arxiv.2005.10130

Abstract

In this paper we show how to approximate the transition density of a CARMA(p, q) model driven by means of a time changed Brownian Motion based on the Gauss-Laguerre quadrature. We then provide an analytical formula for option prices when the log price follows a CARMA(p, q) model. We also propose an estimation procedure based on the approximated likelihood density.

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