Pricing European-Style Options in General Lévy Process with Stochastic Interest Rate

Xiaoyu Tan, Shenghong Li and Shuyi Wang
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Xiaoyu Tan: Department of Mathematics, School of Science, Zhejiang University, Hangzhou 310058, China
Shenghong Li: Department of Mathematics, School of Science, Zhejiang University, Hangzhou 310058, China
Shuyi Wang: Department of Mathematics, School of Science, Zhejiang University, Hangzhou 310058, China

Mathematics, 2020, vol. 8, issue 5, 1-10

Abstract: This paper extends the traditional jump-diffusion model to a comprehensive general Lévy process model with the stochastic interest rate for European-style options pricing. By using the Girsanov theorem and Itô formula, we derive the uniform formalized pricing formulas under the equivalent martingale measure. This model contains not only the traditional jump-diffusion model, such as the compound Poisson model, the renewal model, the pure-birth jump-diffusion model, but also the infinite activities Lévy model.

Keywords: Lévy process; stochastic interest rate; Girsanov theorem; option pricing (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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