Calibration of self-decomposable Lévy models

Abstract

We study the nonparametric calibration of exponential Lévy models with infinite jump activity. In particular our analysis applies to self-decomposable processes whose jump density can be characterized by the $k$-function, which is typically nonsmooth at zero. On the one hand the estimation of the drift, of the activity measure $\alpha:=k(0+)+k(0-)$ and of analogous parameters for the derivatives of the $k$-function are considered and on the other hand we estimate nonparametrically the $k$-function. Minimax convergence rates are derived. Since the rates depend on $\alpha$, we construct estimators adapting to this unknown parameter. Our estimation method is based on spectral representations of the observed option prices and on a regularization by cutting off high frequencies. Finally, the procedure is applied to simulations and real data.