Option pricing under jump diffusion model

DOI10.1016/J.SPL.2024.110137MaRDI QIDQ6580270zbMATH OpenFDO

Authors Li Wang

Publication date 29 July 2024

Published in Statistics \& Probability Letters (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1016/J.SPL.2024.110137

zbMATH Keywords

Feynman-Kac theoremLévy jumpmeasure transformationoption pricing

Mathematics Subject Classification ID

Processes with independent increments; Lévy processes (60G51) Derivative securities (option pricing, hedging, etc.) (91G20)

Review text

In this paper, the authors consider a continuous-time model where the asset price process follows a jump-diffusion and the interest rate is stochastic and follows a jump-diffusion with CIR-type dynamics. The jumps are generated by a compound Poisson process. The asset price process is assumed to be independent of the stochastic interest rate. In this framework, the authors consider the problem of pricing a European call option written on the asset. As a preliminary result, an explicit formula is derived for zero-coupon bond prices. The main result of the paper is a semi-explicit formula for the call option price, expressed as an infinite series. As a further development, the authors consider basket options in the same modeling setup.

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Cites work

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Cited in

(2)

• Pricing options under simultaneous stochastic volatility and jumps: a simple closed-form formula without numerical/computational methods
• Pricing geometric Asian extremum options under mixed fractional Brownian motion with jumps

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