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Activity Number: 462
Type: Topic Contributed
Date/Time: Wednesday, August 5, 2009 : 10:30 AM to 12:20 PM
Sponsor: Business and Economic Statistics Section
Abstract - #303313
Title: L2 Transition Density Approximations for Multivariate Affine Jump-Diffusions
Author(s): Viktor Todorov*+
Companies: Northwestern University
Address: 2001 Sheridan Road, Evanston, IL, 60208,
Keywords: Continuous-time stochastic volatility models ; method-of-moment estimation ; realized multipower variation ; jump processes
Abstract:

We develop expansion methods using orthogonal polynomials for the approximation of transition densities of multivariate affine jump-diffusions. We improve existing methods by working on the correct state space of the process; using the properties of polynomial processes, of which affine diffusions are a subclass, the quality of the expansion is independent of the time-interval between observations. We provide examples with Heston's model and a square-root process with exponential jumps. A variety of applications arises in continuous-time econometrics, option pricing, and credit risk.

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