An empirical study on asymmetric jump diffusion for option and annuity pricing

Kein Joe Lau, Yong Kheng Goh and An Chow Lai

PLOS ONE, 2019, vol. 14, issue 5, 1-18

Abstract: In this paper, we present a method to estimate the market parameters modelled by an asymmetric jump diffusion process. The method proposed is based on Kou’s jump diffusion model while the market parameters refer to the market drift, the market volatility, the jump intensity on market price, and the rate of jump occurrence in a consistent manner throughout the entire paper. The model captures the asymmetric nature of the price fluctuation during up trend markets and down trend markets. The results are compared to conventional options to observe the impact of jump effects. The results from simulation show that the asymmetric jump diffusion model can estimate the fair prices of European call options and annuity better than the Black-Scholes model and the symmetric jump diffusion model proposed by Kou and Merton.

Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:plo:pone00:0216529

DOI: 10.1371/journal.pone.0216529

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