Jump diffusion model with application to the Japanese stock market

Koichi Maekawa, Sangyeol Lee, Takayuki Morimoto and Ken-ichi Kawai

Mathematics and Computers in Simulation (MATCOM), 2008, vol. 78, issue 2, 223-236

Abstract: In this paper we demonstrate that a jump diffusion model is better fitted to Japanese stock data in the Nikkei 225 than the classical Black–Scholes (BS) model. In order to check the existence of jumps, we implement the bipower test by Barndorff-Nielsen and Shephard [O.E. Barndorff-Nielsen, N. Shephard, Econometrics of testing for jumps in financial economics using bipower variation, Unpublished discussion paper, Nuffield College, Oxford, 2004], which reveals that Japanese stock data has jumps. For modeling the data, we choose Kou’s [S.G. Kou, A jump diffusion model for option pricing, Manage. Sci. 48 (2002) 1086–1101] model for its tractability and rich theoretical implications. We compare the option prices obtained from Kou’s and BS’ models with real market prices. The comparison study confirms that Kou’s model outperforms the BS model.

Keywords: Jump diffusion model; Bipower test; Kou’s model; Option pricing; Japanese stock market (search for similar items in EconPapers)
Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:matcom:v:78:y:2008:i:2:p:223-236

DOI: 10.1016/j.matcom.2008.01.030

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