Option Pricing Under a Double Exponential Jump Diffusion Model

S. G. Kou () and Hui Wang ()
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S. G. Kou: Department of IEOR, Columbia University, 312 Mudd Building, New York, New York 10027
Hui Wang: Division of Applied Mathematics, Brown University, Box F, Providence, Rhode Island 02912

Management Science, 2004, vol. 50, issue 9, 1178-1192

Abstract: Analytical tractability is one of the challenges faced by many alternative models that try to generalize the Black-Scholes option pricing model to incorporate more empirical features. The aim of this paper is to extend the analytical tractability of the Black-Scholes model to alternative models with jumps. We demonstrate that a double exponential jump diffusion model can lead to an analytic approximation for finite-horizon American options (by extending the Barone-Adesi and Whaley method) and analytical solutions for popular path-dependent options (such as lookback, barrier, and perpetual American options). Numerical examples indicate that the formulae are easy to implement, and are accurate.

Keywords: contingent claims; high peak; heavy tails; volatility smile; overshoot (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (183)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:50:y:2004:i:9:p:1178-1192

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