School Seminars and Colloquia

Change-of-measure in the square-root process

Completion Seminar

by Stephen Chin


Institution: Centre for Actuarial Studies, The University of Melbourne
Date: Thu 16th September 2010
Time: 1:05 PM
Location: Prest Theatre, Economics & Commerce Building, The University of Melbourne

Abstract: We demonstrate how the square-root process can be used to
compute vanilla options in stochastic volatility models. Our focus is on an explicit change-of-measure formula which can be interpreted as
the absolute continuity relations between squared Bessel processes with different dimensions. We also examine the numerical behaviour of the Radon-Nikodym derivative.

Then, we propose a simple and accurate method to simulate European option prices. Numerical results show that the change-of-measure (CM)
and Andersen's quadratic exponential (QE) scheme perform very closely.

For More Information: contact: Daniel Dufresne. Email: dufresne@unimelb.edu.au