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Pricing and disentanglement of American puts in the hyper-exponential jump-diffusion model

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  • Leippold, Markus
  • Vasiljević, Nikola

Abstract

We analyze American put options in a hyper-exponential jump-diffusion model. Our contribution is threefold. Firstly, by following a maturity randomization approach, we solve the partial integro-differential equation and obtain a tight lower bound for the American option price. Secondly, our method allows to disentangle the contributions of jumps and diffusion for the early exercise premium. Finally, using American-style options on the S&P 100 index from January 2007 until December 2012, we estimate various hyper-exponential specifications and investigate the implications for option pricing and jump-diffusion disentanglement. We find that jump risk accounts for a large part of the early exercise premium.

Suggested Citation

  • Leippold, Markus & Vasiljević, Nikola, 2017. "Pricing and disentanglement of American puts in the hyper-exponential jump-diffusion model," Journal of Banking & Finance, Elsevier, vol. 77(C), pages 78-94.
    • Handle: RePEc:eee:jbfina:v:77:y:2017:i:c:p:78-94
    DOI: 10.1016/j.jbankfin.2017.01.014
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    Cited by:

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    2. Chen, Rongda & Zhou, Hanxian & Yu, Lean & Jin, Chenglu & Zhang, Shuonan, 2021. "An efficient method for pricing foreign currency options," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 74(C).
    3. Cristina Viegas & José Azevedo-Pereira, 2020. "A Quasi-Closed-Form Solution for the Valuation of American Put Options," IJFS, MDPI, vol. 8(4), pages 1-16, October.
    4. Zhiqiang Zhou & Hongying Wu, 2018. "Laplace Transform Method for Pricing American CEV Strangles Option with Two Free Boundaries," Discrete Dynamics in Nature and Society, Hindawi, vol. 2018, pages 1-12, September.
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    6. Walter Farkas & Ludovic Mathys, 2020. "Geometric Step Options with Jumps. Parity Relations, PIDEs, and Semi-Analytical Pricing," Papers 2002.09911, arXiv.org.
    7. Walter Farkas & Ludovic Mathys & Nikola Vasiljević, 2021. "Intra‐Horizon expected shortfall and risk structure in models with jumps," Mathematical Finance, Wiley Blackwell, vol. 31(2), pages 772-823, April.

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    More about this item

    Keywords

    American options; Early exercise premium; Hyper-exponential jump-diffusion model; Maturity randomization; Jump-diffusion disentanglement;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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