Assume that one stock follows the process dS/S = αdt + σdZ (20.44)
Another stock follows the process dQ/Q = αQdt + σdZ + dq1+ dq2 (20.45)
a. If there were no jump terms (i.e., λ1 = λ2 = 0), what would be the relation between α and αQ?
b. Suppose there is just one jump term (λ2 = 0) and that Y1> 1. In words, what does it mean to have Y1> 1? What can you say about the relation between α and αQ?
c. Write an expression for αQ when both jump terms are nonzero. Explain intuitively why αQ might be greater or less than α.

  • CreatedAugust 12, 2015
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