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Option Pricing Under a Double Exponential Jump Diffusion Model

  • S. G. Kou

    ()

    (Department of IEOR, Columbia University, 312 Mudd Building, New York, New York 10027)

  • Hui Wang

    ()

    (Division of Applied Mathematics, Brown University, Box F, Providence, Rhode Island 02912)

Registered author(s):

    Analytical 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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    File URL: http://dx.doi.org/10.1287/mnsc.1030.0163
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    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 50 (2004)
    Issue (Month): 9 (September)
    Pages: 1178-1192

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    Handle: RePEc:inm:ormnsc:v:50:y:2004:i:9:p:1178-1192
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