Cojump risks and their impacts on option pricing

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

The Quarterly Review of Economics and Finance, 2021, vol. 79, issue C, 399-410

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.

Keywords: Correlated bivariate jump-diffusion model; Individual jump; Systematic cojump; Esscher transform (search for similar items in EconPapers)
JEL-codes: C15 C58 G01 G13 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:79:y:2021:i:c:p:399-410

DOI: 10.1016/j.qref.2020.07.009

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