Option Pricing When Jump Risk Is Systematic1

Chang Mo Ahn

Mathematical Finance, 1992, vol. 2, issue 4, 299-308

Abstract: This paper generalizes the Merton jump‐diffusion option pricing model to the case in which jump risk cannot be eliminated in the market portfolio. the option pricing formula is obtained using a general equilibrium asset pricing model. Since jump risk is systematic, the correlation of the underlying stock's jump with the market portfolio's jump affects the option price.

Date: 1992
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