da Silva, A.J.; Baczynski, J.; Vicente, J.V.M. A Stochastically Correlated Bivariate Square-Root Model. Int. J. Financial Stud.2024, 12, 31.
da Silva, A.J.; Baczynski, J.; Vicente, J.V.M. A Stochastically Correlated Bivariate Square-Root Model. Int. J. Financial Stud. 2024, 12, 31.
da Silva, A.J.; Baczynski, J.; Vicente, J.V.M. A Stochastically Correlated Bivariate Square-Root Model. Int. J. Financial Stud.2024, 12, 31.
da Silva, A.J.; Baczynski, J.; Vicente, J.V.M. A Stochastically Correlated Bivariate Square-Root Model. Int. J. Financial Stud. 2024, 12, 31.
Abstract
We introduce a novel stochastically correlated two-factor (i.e., bivariate) diffusion process under the square-root format, for which we obtained, analytically, the corresponding solutions for the conditional moment generating functions and conditional characteristic functions. Such solutions recover verbatim those of the uncorrelated case. We believe that the The aforementioned model encompasses a range of processes similar to that produced by a bivariate square-root process in which entries are correlated in the standard way, i.e., via a constant correlation coefficient. Note that, for the latter, closed-form solutions for the conditional characteristic functions are not available. We focus on the financial scenario of obtaining closed-form expressions for the exact price of a zero-coupon bond and Asian option prices via a Fourier cosine series method.
Computer Science and Mathematics, Probability and Statistics
Copyright:
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