The importance of jumps in pricing European options

Francesca Campolongo, Jessica Cariboni and W. Schoutens

Reliability Engineering and System Safety, 2006, vol. 91, issue 10, 1148-1154

Abstract: The screening method proposed by Morris [Factorial sampling plans for preliminary computational experiments. Technometrics 1991;33:161–74] and recently improved by Campolongo et al. [Using an enhanced Morris method to assess the sensitivity of a large chemical reaction model. 2005, under revision.] has been employed to estimate the importance of the inclusion of jumps in a model for pricing European options. Results confirm that, among the sources of uncontrollable uncertainty, jumps play a major role and therefore need to be better investigated in order to improve the accuracy of the model predictions. The importance of jumps is more pronounced for higher option strike prices, which is when the option is “out of the money†.

Keywords: Option pricing; Heston model; Jump process; Sensitivity analysis; Morris method; Variance-based sensitivity indices (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reensy:v:91:y:2006:i:10:p:1148-1154

DOI: 10.1016/j.ress.2005.11.016

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