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Research on pricing of carbon options based on an improved jump test method

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  • Liang, Xiaohu
  • Pan, Yijing

Abstract

In this paper, we focus on the problem of pricing carbon options. The underlying asset of carbon options is described by a jump diffusion process. We first improve the jump test method proposed by Lee and Mykland (2008) for identifying abnormal jumps in asset price series and estimating model parameters. Building on this framework, our approach enables pricing analysts to adjust data structures with greater flexibility based on quantitative evidence, thereby enhancing the flexibility of carbon options pricing. Finally, we employ Monte Carlo simulations and empirical data to validate and discuss this method.

Suggested Citation

  • Liang, Xiaohu & Pan, Yijing, 2026. "Research on pricing of carbon options based on an improved jump test method," Finance Research Letters, Elsevier, vol. 90(C).
    • Handle: RePEc:eee:finlet:v:90:y:2026:i:c:s1544612325026558
    DOI: 10.1016/j.frl.2025.109406
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    References listed on IDEAS

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