A Self-Excited Switching Jump Diffusion (SESJD): properties, calibration and hitting time

A way to model the clustering of jumps in asset prices consists in combining a diffusion process with a jump Hawkes process. This article proposes a new alternative model based on regime switching processes, referred to as a... [ view full abstract ]

A way to model the clustering of jumps in asset prices consists in combining a diffusion process with a jump Hawkes process. This article proposes a new alternative model based on regime switching processes, referred to as a self-excited switching jump diffusion (SESJD) model. In this model, jumps in the asset prices are synchronized with changes of states of a hidden Markov chain. The matrix of transition probabilities of this chain is designed in order to approximate the dynamics of a Hawkes process. This model presents several advantages compared to other jump clustering models.