The Normal-Generalised Gamma-Pareto process: A novel pure-jump L\'evy process with flexible tail and jump-activity properties

arXiv2006.10968MaRDI QIDQ6343262

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Publication date: 19 June 2020

Abstract: Pure-jump L'evy processes are popular classes of stochastic processes which have found many applications in finance, statistics or machine learning. In this paper, we propose a novel family of self-decomposable L'evy processes where one can control separately the tail behavior and the jump activity of the process, via two different parameters. Crucially, we show that one can sample exactly increments of this process, at any time scale; this allows the implementation of likelihood-free Markov chain Monte Carlo algorithms for (asymptotically) exact posterior inference. We use this novel process in L'evy-based stochastic volatility models to predict the returns of stock market data, and show that the proposed class of models leads to superior predictive performances compared to classical alternatives.

Has companion code repository: https://github.com/oxcsml-bayesnp/nggp

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