Pricing Vulnerable Options with Jump Clustering

Yong Ma, Keshab Shrestha and Weidong Xu

Journal of Futures Markets, 2017, vol. 37, issue 12, 1155-1178

Abstract: This paper presents a valuation of vulnerable European options using a model with self‐exciting Hawkes processes that allow for clustered jumps rather than independent jumps. Many existing valuation models can be regarded as special cases of the model proposed here. Using numerical analyses, this study also performs sensitivity analyses and compares the results to those of existing models for European call options. The results show that jump clustering has a significant impact on the option value. © 2017 Wiley Periodicals, Inc. Jrl Fut Mark

Date: 2017
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