Convexity preserving jump-diffusion models for option pricing

DOI10.1016/J.JMAA.2006.07.088zbMATH Open1250.91110arXivmath/0601526OpenAlexW2106590032MaRDI QIDQ874977FDOQ874977

Erik Ekström, Johan Tysk

Publication date: 10 April 2007

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

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.

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)

Cites Work

• Title not available (Why is that?)
• Robustness of the Black and Scholes Formula
• Volatility misspecification, option pricing and superreplication via coupling
• Incompleteness of markets driven by a mixed diffusion
• Volatility time and properties of option prices
• Comparison of option prices in semimartingale models
• Preservation of convexity of solutions to parabolic equations
• MONOTONICITY AND CONVEXITY OF OPTION PRICES REVISITED
• Superreplication of Options on Several Underlying Assets

Cited In (7)

• Perpetual American options with asset-dependent discounting
• On shape preserving semigroups
• BOUNDS ON OPTION PRICES IN POINT PROCESS DIFFUSION MODELS
• Total positivity and relative convexity of option prices
• On the behaviour near expiry for multi-dimensional American options
• Convexity theory for the term structure equation
• Computation of the unknown volatility from integral option price observations in jump-diffusion models

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