A short note on option pricing with Lévy Processes
In this paper, we provide exact formulas for the pricing of European options under the risk neutral measure, whereas under the historic measure the data follow two types of models : a GARCH process with Lévy innovations, or a GARCH process with Poisson jumps. This approach aims to take realistic account of the jumps that are observed in the markets and to introduce them into the theory of pricing in incomplete markets. We assume that the "pricing kenel" that can move from measurement historical risk-neutral measure can be obtained from the Esscher transform (Siu et al., 1994), or using the MEMM transformation introduced by Elliott and Madam (1998). We show how these two types of "pricing kernels" impact on the options prices and through an example we quantify the difference.
|Date of creation:||Oct 2010|
|Date of revision:|
|Publication status:||Published in Documents de travail du Centre d'Economie de la Sorbonne 2010.78 - ISSN : 1955-611X. 2010|
|Note:||View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00542475|
|Contact details of provider:|| Web page: https://hal.archives-ouvertes.fr/|
When requesting a correction, please mention this item's handle: RePEc:hal:cesptp:halshs-00542475. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD)
If references are entirely missing, you can add them using this form.