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The Stochastically Subordinated Log Normal Process Applied To Financial Time Series And Option Pricing, D. Edelman, T. Gillespie
The Stochastically Subordinated Log Normal Process Applied To Financial Time Series And Option Pricing, D. Edelman, T. Gillespie
Faculty of Business - Accounting & Finance Working Papers
The method of stochastic subordination, or random time indexing, has been recently applied to Wiener process price processes to model financial returns. Previous emphasis in stochastic subordination models has involved explicitly identifying the subordinating process with an observable quantity such as number of trades. In contrast, the approach taken here does not depend on the specific identification of the subordinated time variable, but rather assumes a class of time models and estimates parameters from data. In addition, a simple Markov process is proposed for the characteristic parameter of the subordinating distribution to explain the significant autocorrelation of the squared returns. …