Hybrid Lévy models: Design and computational aspects

Two different versions of a hybrid interest rate-equity model are developed. Independent time-inhomogeneous Lévy processes are used as drivers of the dynamics. Dependence between the markets is generated by introducing the... [ view full abstract ]

Two different versions of a hybrid interest rate-equity model are developed. Independent time-inhomogeneous Lévy processes are used as drivers of the dynamics. Dependence between the markets is generated by introducing the driver of one market as an additional term into the dynamics of the other. In both cases the dependence can be quantified by a single parameter. Numerically efficient valuation formulas for derivatives are developed. As an example for a hybrid financial product a performance basket is discussed. Using market quotes for liquidly traded interest rate and equity derivatives we show that the hybrid approach can be successfully calibrated.