Forward equations for option prices in semimartingale models (Q2516772)

In general, partial differential equations (PDEs), both backward and forward, have been used widely for many years as a way of characterizing and efficiently computing option prices. In this work it is shown that the forward PDE for call prices holds in a general setting where the dynamics of the underlying asset is described by a possibly discontinuous semimartingale. The parameterization of the price dynamics is general, allows stochastic volatility, and does not assume jumps to be independent or driven by a Lévy process, although it includes these cases. Also, the derivation of the equation does not require ellipticity or nondegeneracy of the diffusion coefficient. The result is thus applicable to various stochastic volatility models with jumps, pure jump models, and point process models used in equity and credit risk modeling.