Pricing and disentanglement of American puts in the hyper-exponential jump-diffusion model

Markus Leippold () and Nikola Vasiljević

Journal of Banking & Finance, 2017, vol. 77, issue C, 78-94

Abstract: We analyze American put options in a hyper-exponential jump-diffusion model. Our contribution is threefold. Firstly, by following a maturity randomization approach, we solve the partial integro-differential equation and obtain a tight lower bound for the American option price. Secondly, our method allows to disentangle the contributions of jumps and diffusion for the early exercise premium. Finally, using American-style options on the S&P 100 index from January 2007 until December 2012, we estimate various hyper-exponential specifications and investigate the implications for option pricing and jump-diffusion disentanglement. We find that jump risk accounts for a large part of the early exercise premium.

Keywords: American options; Early exercise premium; Hyper-exponential jump-diffusion model; Maturity randomization; Jump-diffusion disentanglement (search for similar items in EconPapers)
JEL-codes: C51 C52 C61 G01 G12 G13 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Working Paper: Pricing and Disentanglement of American Puts in the Hyper-Exponential Jump-Diffusion Model (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:77:y:2017:i:c:p:78-94

DOI: 10.1016/j.jbankfin.2017.01.014

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