Documente Academic
Documente Profesional
Documente Cultură
2, 399–408 (1998)
c Springer-Verlag 1998
1 Introduction
!
ln( SK0 ) − rT + 12 Σ 2 T
C BS
(Σ, K , T ) = S0 N √
Σ T
!
−rT ln( SK0 ) − rT − 12 Σ 2 T
−Ke N √
Σ T
where S0 is the actual value of the underlying, r is the risk-free interest rate,
N (x ) is the cumulative density function of a standard normal law.
Now, in the “real world”, the price structure observed in the market leads to
a function Σ of both Ti and Kj . Thus, one of the aims of mathematical finance
research is to obtain a model on the underlying process which will reproduce
this structure.
For the sake of simplicity, we will assume here that under the risk neutral
probability, r = 0. A deterministic rate could be easily added to our arguments.
We can firstly notice that, under the risk neutral probability, if C (K , T ) is the
market call option price,
∂C
P(STi < Kj ) = − (Ki , Tj ).
∂K
This remark shows that it is equivalent to know every market price for every
strike and every maturity or to know the one-dimensional marginals (: laws) of
the underlying for every t. However, many models could still be suggested.
In order to fit a structure of prices, the following stochastic volatility models
were introduced by Hull and White [HW87]:
dSt p
= 1 − ρ2 σt dWt(1) + ρσt dWt(2) ,
St
d σt = a(σt , t) dt + b(σt , t) dWt(2) .
where Wt(1) and Wt(2) , ρ is a correlation factor and a and b are two functions
which ensure the existence of σ.
Another famous and simple model was suggested by Dupire [Dup93]. Indeed,
taking option prices C (K , T ) and a diffusion model
with
∂C (x ,t)
1 2 ∂t
σ (x , t) = ∂ 2 C (x ,t)
,
2
∂x 2
then one will get back (at least if σ(S , t) is bounded by two strictly positive
values),
E [(ST − K )+ ] = C (K , T ).
Thus, knowing all prices for every K and every T , one could easily get a diffusion
model which reproduces those prices. It has to be noticed that those prices could
be either generated by market prices or generated by some stochastic volatility
model. In that last case, all the vanilla option prices will be the same but the
Lévy processes in finance: a remedy to the non-stationarity of continuous martingales 401
dynamics will be different and so will be exotic option prices. For instance, it
has been shown (see [Leb97]) that lookback options will always be different in
the two models unless σ is constant.
Then, which model i.e which dynamics should we choose? One financial
key-argument is based on forward options. A forward option is a standard option
but whose payoff is based on the future values of the underlying. Typically,
ST
C F (K , t, T ) = E [( − K )+ ], t < T
St
is a forward option T − t years in t year (based on the yield). The idea is that
this option should only depend on T − t. Indeed the one-week randomness of the
yield in two years should be the same as the one-week randomness of the yield
in three years and this will be roughly the same as the one-week randomness
now if no known events are expected.
Thus, taking the logarithm of the underlying, Xt = ln( SS0t ), we could guess
that a good dynamic feature will be:
(law)
∀u and ξ fixed, Xu+ξ − Xu = Xξ . (1)
where |σ| is continuous a.s. at time t = 0 follows (1), then necessarily du dP a.s.,
(|σu | , u ≥ 0) is equal to a constant c; hence,
(law)
(Xt , t ≥ 0) = (cβt , t ≥ 0)
where γ.(ξ) ≡ √1 γξ. is a standard Brownian motion. Then, γ (ξ) and G∞ are
ξ
asymptotically independent when ξ converges to zero.
More precisely, for any Borel bounded functional Φ: C (R+ , R) → R, and any
bounded G∞ -measurable H ,
lim E Φ(γ (ξ) )H = E [Φ(γ)] E [H ]. (2)
ξ→0
Proof. For each deterministic Borel function f , bounded and with compact sup-
port, and H ∈ L 2 (G∞ ), we define:
R∞ R∞ 2
i f (u)d γu(ξ) + 12 f (u)du
Iξ = E [e 0 0 H ].
The change of variable u = ξ1 hM is , in the integrals yields
Iξ = E [εif∞ H ],
where R∞ R∞ d hM is
i f ( ξ1 hM is ) √
dMs 1
+2 f ( ξ1 hM is )2 ξ
εif∞ =e 0 ξ 0
.
Let Z t
Ht = E [H /Gt ] = hs dMs + Rt ,
0
where Rt is a martingale which is orthogonal to M (note that R0 = E [H /G0 ] =
H0 ). Thus, we get,
Z ∞
hM iu hu d hM iu
Iξ = E [H0 ] + iE εifu f ( ) √
ξ ξ
Z0 ∞
hM iu hu d hM iu
= E [H ] + iE εifu f ( ) √
0 ξ ξ
We may assume, from a density
R ∞ argument, that h is bounded (say by 1) and we
obtain, letting cf = exp 12 0 f 2 (u)du :
Z ∞
hM iu d hM iu
|Iξ − E (H )| ≤ cf E |f ( )| √
0 ξ ξ
Z ∞ p Z ∞
t dt
≤ cf |f ( )| √ = cf ξ |f (u)|du
0 ξ ξ 0
The lemma applies with Gt = Ft+u and it follows that γ (ξ) and F∞ are asymp-
totically independent.
R u+ξ
Consequently, √1 u σs dWs = γ (ξ) R u+ξ converge in distribution to
ξ 1 2
ξ σs ds
u
|σu |N , where N is a standard centered gaussian variable independent of |σu |.
(Here we used the measurability of σ with respect to F∞ and the continuity in
u of |σ|).
Under the hypothesis (1), the last result applies with u = 0, and we get:
(law)
|σu | = |σ0 |.
Since the σ-field F0+ is trivial, |σ0 | and thus the process |σu | are constant a.s
and equal to c ∈ R+ .
In the general case where σ is not necessarily continuous, we get from
Lebesgue’s theorem,
Z
1 u+ξ 2
P (d ω) du a.s, lim σs ds = σu2 (ω)
ξ→0 ξ u
and from Fubini’s theorem, we deduce that for every continuous and bounded f ,
1
du a.s, lim EP [f ( √ (Xu+ξ − Xu ))] = EP [f (|σu |N )], (3)
ξ→0 ξ
and this last expression does not depend on u from the hypothesis (1). If, more-
over, |σ| is continuous a.s at 0, then,
Now, |σ0 | is constant and thus |σu | is equal to the same constant du dP a.s.
Remark. As carefully discussed in Chung-Williams [CW89] paragraph 3.3, fol-
lowing partially Itô [Ito44], [Ito61], the Itô stochastic integral may be defined
for any Ft -adapted, B[0,∞] ⊗ F∞ measurable process σ, which satisfies the
integrability condition in Theorem 1. Our proof of Theorem 1 extends without
any change to this more general class of integrands provided |σ| is continuous
at time 0. Note that (see [CW89]) for any “general” integrand σ, there exists a
predictable generalized process σ̃ such that σu (ω) = σ̃u (ω) du dP a.s.
Moreover, the example given by M. Barlow on page 71 of [CW89] shows
that stochastic integration with respect to a general continuous martingale cannot
be defined for such general measurable integrands.
404 B. Leblanc, M. Yor
3.1
Now, from the triviality of F0+ and (5), there exists a real c ≥ 0 such that,
Z u+ξ
1
for every u ≥ 0, P (lim σs2 ds = c) = 1,
ξ→0 ξ u
3.2
The importance of the continuity of |σ| at time 0 shows up clearly in the following
statement about Brownian martingales having the scaling property.
Theorem 3. Let Ft be a filtration in which W is a Brownian Rmotion and F0+ is
t
trivial. Let (σRt ) be predictable with respect to Ft and satisfy: 0 σu2 du < ∞, for
∞ 2
every t, and 0 σu du = ∞. We assume moreover that (|σu |, u ≥ 0) is continuous
a.s at time 0. Rt
If the local martingale Xt = 0 σu dWu satisfies
(law) √
for each λ > 0, (Xλt , t ≥ 0) = ( λXt , t ≥ 0), (6)
(law)
(Xt , t ≥ 0) = (cβt , t ≥ 0),
(law) √
for each λ > 0, (Wλt , θλt ; t ≥ 0) = ( λWt , θt ; t ≥ 0).
Proof of Theorem 3. From the scaling property of X , and the well-known ap-
proximation of hX it by sums of squares of increments, we deduce from (6) that:
R λt Rt
for each λ > 0, ( λ1 0 σu2 du, t ≥ 0)=(law) ( 0 σu2 du, t ≥ 0).
Letting λ → 0 on the left hand side, and using the a.s continuity of (|σu |, u ≥
0) at 0, we obtain:
Z t
(law)
( σu2 du, t ≥ 0) = (c 2 t, t ≥ 0),
0
where c = |σ0 |. (Of course, the equality in law is, in fact, an a.s equality).
Finally, we obtain:
(law)
(Xt , t ≥ 0) = (cβt , t ≥ 0),
as announced.
406 B. Leblanc, M. Yor
3.3
We now come back to our previous stationarity problem, but we consider more
generally, Itô type semimartingales:
Z t Z t
Xt = σu dWu + bu du,
0 0
then, obviously, the strong stationarity hypothesis (4) holds for (Xu , u ≥ 0),
given by (7).
Here is now a “concrete” example, which indeed plays a fundamental role in
linear filtering theory (see, e.g, Rogers-Williams [RW87], pp. 322–329) of a pair
(β, b) which satisfies (10):
If (bu ≡ Uu , u ≥ 0) is a stationary Ornstein-Uhlenbeck process, driven by a
Brownian motion (γu , u ≥ 0), i.e:
Z
1 u
Uu = U0 + γu − Us ds,
2 0
Lévy processes in finance: a remedy to the non-stationarity of continuous martingales 407
where U0 is a standard centered Gaussian variable, independent of the pair (β, γ),
and β and γ are linearly correlated, i.e, hβ, γit ≡ ρt, (|ρ| ≤ 1), then (10) is
satisfied. For simplicity, we (and the reader) may assume: ρ = 0.
At this point, we underline that, just as in (8), the decomposition:
Z t
Xt = cβt + Uu du (11)
0
3.4
We now make some similar remarks about the class of “weak” stationary
n-dimensional local martingales of the form
Z t
Xt = σu dWu , t ≥ 0,
0
(law)
{(θ, Xt ); t ≥ 0} = {(θ, σ0 βt ); t ≥ 0} (12)
3.5
As a conclusion of this note, we have seen that the weak stationarity assumption
(1) leads quickly to strong constraints for continuous martingales, and we have
studied related questions.
We hope to clarify some of the points which eluded us in Sections 3.3 and
3.4, as well as study under which additional conditions would a right-continuous
martingale which satisfies (1) be in fact a Lévy process.
Finally, we would like to say that both the technique and the results in this
note are reminiscent of asymptotic studies on continuous martingales as found
in [Del92] and [RY94], chap. XIII.
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