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Pricing of index options under a minimal market model with log-normal scaling

Heath, David; Platen, Eckhard


This paper describes a two-factor model for a diversified market index using the growth optimal portfolio with a stochastic and possibly correlated intrinsic timescale. The index is modelled using a time transformed squared Bessel process with a log-normal scaling factor for the time transformation. A consistent pricing and hedging framework is established by using the benchmark approach. Here the numeraire is taken to be the growth optimal portfolio. Benchmarked traded prices appear as...[Show more]

CollectionsANU Research Publications
Date published: 2003
Type: Journal article
Source: Quantitative Finance
DOI: 10.1088/1469-7688/3/6/303


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