Gibbs sampler with jump diffusion model: application in European call option and annuity

Kein Joe Lau, Yong Kheng Goh and An-Chow Lai

Papers from arXiv.org

Abstract: In this paper, we are presenting a method for estimation of market parameters modeled by jump diffusion process. The method proposed is based on Gibbs sampler, while the market parameters are the drift, the volatility, the jump intensity and its rate of occurrence. Demonstration on how to use these parameters to estimate the fair price of European call option and annuity will be shown, for the situation where the market is modeled by jump diffusion process with different intensity and occurrence. The results is compared to conventional options to observe the impact of jump effects.

Date: 2017-12
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