Computational Economics

, Volume 53, Issue 3, pp 1279–1308 | Cite as

Quanto Option Pricing with Lévy Models

  • Hasan A. Fallahgoul
  • Young S. KimEmail author
  • Frank J. Fabozzi
  • Jiho Park


We develop a multivariate Lévy model and apply the bivariate model for the pricing of quanto options that captures three characteristics observed in real-world markets for stock prices and currencies: jumps, heavy tails and skewness. The model is developed by using a bottom-up approach from a subordinator. We do so by replacing the time of a Brownian motion with a Lévy process, exponential tilting subordinator. We refer to this model as a multivariate exponential tilting process. We then compare using a time series of daily log-returns and market prices of European-style quanto options the relative performance of the exponential tilting process to that of the Black–Scholes and the normal tempered stable process. We find that, due to more flexibility on capturing the information of tails and skewness, the proposed modeling process is superior to the other two processes for fitting market distribution and pricing quanto options.


Quanto option pricing Lévy process Stable and tempered stable process Subordinator 

JEL Classification

C0 C02 C1 

Supplementary material

10614_2018_9807_MOESM1_ESM.pdf (517 kb)
Supplementary material 1 (pdf 516 KB)


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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.School of Mathematical Sciences and Centre for Quantitative Finance and Investment StrategiesMonash UniversityClaytonAustralia
  2. 2.College of BusinessStony Brook UniversityStony BrookUSA
  3. 3.EDHEC Business SchoolLilleFrance

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