Smart expansion and fast calibration for jump diffusion
Using Malliavin calculus techniques, we derive an analytical formula for the price of European options, for any model including local volatility and Poisson jump process. We show that the accuracy of the formula depends on the smoothness of the payoff function. Our approach relies on an asymptotic expansion related to small diffusion and small jump frequency/size. Our formula has excellent accuracy (the error on implied Black-Scholes volatilities for call option is smaller than 2 bp for various strikes and maturities). Additionally, model calibration becomes very rapid.
References listed on IDEAS
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- Alan L. Lewis, 2000. "Option Valuation under Stochastic Volatility," Option Valuation under Stochastic Volatility, Finance Press, number ovsv, December.
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"Option pricing when underlying stock returns are discontinuous,"
787-75., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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- Mark Rubinstein., 1994. "Implied Binomial Trees," Research Program in Finance Working Papers RPF-232, University of California at Berkeley.
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