OPTION PRICING IN THE VARIANCE-GAMMA MODEL UNDER THE DRIFT JUMP

Roman V. Ivanov ()
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Roman V. Ivanov: Laboratory of Control under Incomplete Information, Trapeznikov Institute of Control Sciences of RAS, Profsoyuznaya, 65, 117342 Moscow, Russian Federation

International Journal of Theoretical and Applied Finance (IJTAF), 2018, vol. 21, issue 04, 1-19

Abstract: This paper continues elements of the research direction of the work of Madan et al. [(1998) The variance gamma process and option pricing, European Finance Review 2, 79–105] and gives analytical expressions for the prices of digital and European call options in the variance-gamma model under the assumption that the linear drift rate of stock log-returns can suddenly jump downwards. The time of the jump is taken to be exponentially distributed. The formulas obtained require the computation of some generalized hyperbolic functions.

Keywords: European option; variance-gamma process; drift jump; exponential distribution; generalized hyperbolic function (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1142/S0219024918500188

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