PREFERENCES, LÉVY JUMPS AND OPTION PRICING

Chenghu Ma
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Chenghu Ma: WISE, Xiamen University, China 361005, China

Annals of Financial Economics (AFE), 2007, vol. 03, issue 01, 1-33

Abstract: This paper derives an equilibrium formula for pricing European options and other contingent claims which allows incorporating impacts of several important economic variable on security prices including, among others, representative agent preferences, future volatility and rare jump events. The derived formulae is general and flexible enough to include some important option pricing formulae in the literature, such as Black–Scholes, Naik–Lee, Cox–Ross and Merton option pricing formulae. The existence of jump risk as a potential explanation of the moneyness biases associated with the Black–Scholes model is explored.

Keywords: Equilibrium option pricing; recursive utility; Levy jumps; G10; G11; G12; G13 (search for similar items in EconPapers)
Date: 2007
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DOI: 10.1142/S2010495207500017

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