EconPapers    
Economics at your fingertips  
 

Pricing discrete path-dependent options under a double exponential jump–diffusion model

Cheng-Der Fuh, Sheng-Feng Luo and Ju-Fang Yen

Journal of Banking & Finance, 2013, vol. 37, issue 8, 2702-2713

Abstract: We provide methodologies to price discretely monitored exotic options when the underlying evolves according to a double exponential jump diffusion process. We show that discrete barrier or lookback options can be approximately priced by their continuous counterparts’ pricing formulae with a simple continuity correction. The correction is justified theoretically via extending the corrected diffusion method of Siegmund (1985). We also discuss the jump effects on the performance of this continuity correction method. Numerical results show that this continuity correction performs very well especially when the proportion of jump volatility to total volatility is small. Therefore, our method is sufficiently of use for most of time.

Keywords: Barrier options; Lookback options; Jump diffusion models; Continuity correction; Laplace transform (search for similar items in EconPapers)
JEL-codes: G13 C02 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (3) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378426613001660
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:8:p:2702-2713

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Series data maintained by Dana Niculescu ().

 
Page updated 2017-09-29
Handle: RePEc:eee:jbfina:v:37:y:2013:i:8:p:2702-2713