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A Bivariate Mutually-Excited Switching Jump Diffusion (BMESJD) for Asset Prices

par Hainaut, Donatien;Deelstra, Griselda
Référence Methodology and Computing in Applied Probability, 21, 4, page (1337-1375)
Publication Publié, 2018-12-01

Article révisé par les pairs

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Résumé :

We propose a new approach for bivariate financial time series modelling which allows for mutual excitation between shocks. Jumps are triggered by changes of regime of a hidden Markov chain whose matrix of transition probabilities is constructed in order to approximate a bivariate Hawkes process. This model, called the Bivariate Mutually-Excited Switching Jump Diffusion (BMESJD) presents several interesting features. Firstly, compared to alternative approaches for modelling the contagion between jumps, the calibration is easier and performed with a modified Hamilton’s filter. Secondly, the BMESJD allows for simultaneous jumps when markets are highly stressed. Thirdly, a family of equivalent probability measures under which the BMESJD dynamics are preserved, is well identified. Finally, the BMESJD is a continuous time process that is well adapted for pricing options with two underlying assets.