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Cojump risks and their impacts on option pricing

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  • Lian, Yu-Min
  • Chen, Jun-Home
  • Liao, Szu-Lang

Abstract

In this study, we investigate the no-arbitrage valuation of options on two assets whereby one asset is exchanged for another. For incorporating surprising events in the underlying asset price dynamics, we model such stochastic processes by a correlated bivariate jump-diffusion model with capturing both individual jumps and systematic cojumps. Furthermore, we employ the technique of Esscher transform to determine a pricing kernel for option valuation under an incomplete market setting. Finally, the estimated results and numerical examples are given.

Suggested Citation

  • Lian, Yu-Min & Chen, Jun-Home & Liao, Szu-Lang, 2021. "Cojump risks and their impacts on option pricing," The Quarterly Review of Economics and Finance, Elsevier, vol. 79(C), pages 399-410.
    • Handle: RePEc:eee:quaeco:v:79:y:2021:i:c:p:399-410
    DOI: 10.1016/j.qref.2020.07.009
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    Cited by:

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    More about this item

    Keywords

    Correlated bivariate jump-diffusion model; Individual jump; Systematic cojump; Esscher transform;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G01 - Financial Economics - - General - - - Financial Crises
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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