Option Pricing Under a Double Exponential Jump Diffusion Model
AbstractAnalytical tractability is one of the challenges faced by many alternative models that try to generalize the Black-Scholes option pricing model to incorporate more empirical features. The aim of this paper is to extend the analytical tractability of the Black-Scholes model to alternative models with jumps. We demonstrate that a double exponential jump diffusion model can lead to an analytic approximation for finite-horizon American options (by extending the Barone-Adesi and Whaley method) and analytical solutions for popular path-dependent options (such as lookback, barrier, and perpetual American options). Numerical examples indicate that the formulae are easy to implement, and are accurate.
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Bibliographic InfoArticle provided by INFORMS in its journal Management Science.
Volume (Year): 50 (2004)
Issue (Month): 9 (September)
contingent claims; high peak; heavy tails; volatility smile; overshoot;
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