Convexity preserving jump-diffusion models for option pricing

DOI10.1016/J.JMAA.2006.07.088MaRDI QIDQ874977zbMATH OpenOpenAlexFDO

Authors Erik Ekström, Johan Tysk

Publication date 10 April 2007

Published in Journal of Mathematical Analysis and Applications (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/math/0601526

zbMATH Keywords

optionsconvexityintegro-differential equationsjump-diffusionsoption price orderings

Mathematics Subject Classification ID

Applications of Brownian motions and diffusion theory (population genetics, absorption problems, etc.) (60J70) Diffusion processes (60J60) Portfolio theory (91G10) Financial applications of other theories (91G80)

Abstract: We investigate which jump-diffusion models are convexity preserving. The study of convexity preserving models is motivated by monotonicity results for such models in the volatility and in the jump parameters. We give a necessary condition for convexity to be preserved in several-dimensional jump-diffusion models. This necessary condition is then used to show that, within a large class of possible models, the only convexity preserving models are the ones with linear coefficients.

Recommendations

• PROPERTIES OF OPTION PRICES IN MODELS WITH JUMPS
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• Pricing equations in jump-to-default models
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Cites work

• scientific article; zbMATH DE number 3383329 (Why is no real title available?)
• Comparison of option prices in semimartingale models
• Incompleteness of markets driven by a mixed diffusion
• MONOTONICITY AND CONVEXITY OF OPTION PRICES REVISITED
• Preservation of convexity of solutions to parabolic equations
• Robustness of the Black and Scholes Formula
• Superreplication of Options on Several Underlying Assets
• Volatility misspecification, option pricing and superreplication via coupling
• Volatility time and properties of option prices

Cited in

(10)

• Total positivity and relative convexity of option prices
• On the behaviour near expiry for multi-dimensional American options
• Pricing equations in jump-to-default models
• PROPERTIES OF OPTION PRICES IN MODELS WITH JUMPS
• Computation of the unknown volatility from integral option price observations in jump-diffusion models
• Perpetual American options with asset-dependent discounting
• Bounds on option prices in point process diffusion models
• Convexity theory for the term structure equation
• Directionally convex ordering in multidimensional jump diffusions models
• On shape preserving semigroups

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