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On the Esscher transforms and other equivalent martingale measures for Barndorff-Nielsen and Shephard stochastic volatility models with jumps
Authors:Friedrich Hubalek  Carlo Sgarra
Institution:1. Vienna University of Technology, Financial and Actuarial Mathematics, Wiedner Hauptstraße 8 /105-1, A-1040 Vienna, Austria;2. Department of Mathematics, Politecnico di Milano, Piazza Leonardo da Vinci, 32, I-20133 Milan, Italy
Abstract:We compute and then discuss the Esscher martingale transform for exponential processes, the Esscher martingale transform for linear processes, the minimal martingale measure, the class of structure preserving martingale measures, and the minimum entropy martingale measure for stochastic volatility models of the Ornstein–Uhlenbeck type as introduced by Barndorff-Nielsen and Shephard. We show that in the model with leverage, with jumps both in the volatility and in the returns, all those measures are different, whereas in the model without leverage, with jumps in the volatility only and a continuous return process, several measures coincide, some simplifications can be made and the results are more explicit. We illustrate our results with parametric examples used in the literature.
Keywords:Esscher martingale transform for stochastic processes  Stochastic volatility models with jumps  Optimal martingale measures  Option pricing
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