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Residue Sum Formula for Pricing Options under the Variance Gamma Model

Author

Listed:
  • Pedro Febrer

    (ISEG—School of Economics and Management, Universidade de Lisboa, Rua do Quelhas 6, 1200-781 Lisboa, Portugal)

  • João Guerra

    (ISEG—School of Economics and Management, Universidade de Lisboa, Rua do Quelhas 6, 1200-781 Lisboa, Portugal
    REM—Research in Economics and Mathematics, CEMAPRE, Rua do Quelhas 6, 1200-781 Lisboa, Portugal)

Abstract

We present and prove a triple sum series formula for the European call option price in a market model where the underlying asset price is driven by a Variance Gamma process. In order to obtain this formula, we present some concepts and properties of multidimensional complex analysis, with particular emphasis on the multidimensional Jordan Lemma and the application of residue calculus to a Mellin–Barnes integral representation in C 3 , for the call option price. Moreover, we derive triple sum series formulas for some of the Greeks associated to the call option and we discuss the numerical accuracy and convergence of the main pricing formula.

Suggested Citation

  • Pedro Febrer & João Guerra, 2021. "Residue Sum Formula for Pricing Options under the Variance Gamma Model," Mathematics, MDPI, vol. 9(10), pages 1-29, May.
    • Handle: RePEc:gam:jmathe:v:9:y:2021:i:10:p:1143-:d:557230
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    References listed on IDEAS

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    1. Peter Carr & Liuren Wu, 2003. "The Finite Moment Log Stable Process and Option Pricing," Journal of Finance, American Finance Association, vol. 58(2), pages 753-777, April.
    2. Jean-Philippe Aguilar & Jan Korbel, 2019. "Simple Formulas for Pricing and Hedging European Options in the Finite Moment Log-Stable Model," Risks, MDPI, vol. 7(2), pages 1-14, April.
    3. Madan, Dilip B & Seneta, Eugene, 1990. "The Variance Gamma (V.G.) Model for Share Market Returns," The Journal of Business, University of Chicago Press, vol. 63(4), pages 511-524, October.
    4. Jean-Philippe Aguilar & Jan Korbel, 2018. "Option Pricing Models Driven by the Space-Time Fractional Diffusion: Series Representation and Applications," Papers 1802.09864, arXiv.org.
    5. Mandelbrot, Benoit B, 1972. "Correction of an Error in "The Variation of Certain Speculative Prices" (1963)," The Journal of Business, University of Chicago Press, vol. 45(4), pages 542-543, October.
    6. Benoit Mandelbrot, 2015. "The Variation of Certain Speculative Prices," World Scientific Book Chapters, in: Anastasios G Malliaris & William T Ziemba (ed.), THE WORLD SCIENTIFIC HANDBOOK OF FUTURES MARKETS, chapter 3, pages 39-78, World Scientific Publishing Co. Pte. Ltd..
    7. Dilip B. Madan & Peter P. Carr & Eric C. Chang, 1998. "The Variance Gamma Process and Option Pricing," Review of Finance, European Finance Association, vol. 2(1), pages 79-105.
    8. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
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    10. repec:bla:jfinan:v:58:y:2003:i:2:p:753-778 is not listed on IDEAS
    11. Fang, Fang & Oosterlee, Kees, 2008. "A Novel Pricing Method For European Options Based On Fourier-Cosine Series Expansions," MPRA Paper 9319, University Library of Munich, Germany.
    12. Rama Cont & Ekaterina Voltchkova, 2005. "A Finite Difference Scheme for Option Pricing in Jump Diffusion and Exponential Lévy Models," Post-Print halshs-00445645, HAL.
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