Unifying pricing formula for several stochastic volatility models with jumps

Falko Baustian, Milan Mrázek, Jan Pospíšil and Tomáš Sobotka

Applied Stochastic Models in Business and Industry, 2017, vol. 33, issue 4, 422-442

Abstract: In this paper, we introduce a unifying approach to option pricing under continuous‐time stochastic volatility models with jumps. For European style options, a new semi‐closed pricing formula is derived using the generalized complex Fourier transform of the corresponding partial integro‐differential equation. This approach is successfully applied to models with different volatility diffusion and jump processes. We also discuss how to price options with different payoff functions in a similar way. In particular, we focus on a log‐normal and a log‐uniform jump diffusion stochastic volatility model, originally introduced by Bates and Yan and Hanson, respectively. The comparison of existing and newly proposed option pricing formulas with respect to time efficiency and precision is discussed. We also derive a representation of an option price under a new approximative fractional jump diffusion model that differs from the aforementioned models, especially for the out‐of‐the money contracts. Copyright © 2017 John Wiley & Sons, Ltd.

Date: 2017
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https://doi.org/10.1002/asmb.2248

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Persistent link: https://EconPapers.repec.org/RePEc:wly:apsmbi:v:33:y:2017:i:4:p:422-442

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