Pricing and Disentanglement of American Puts in the Hyper-Exponential Jump-Diffusion Model

Markus Leippold () and Nikola Vasiljevic
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Nikola Vasiljevic: University of Zurich and Swiss Finance Institute (PhD Program)

No 15-08, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We analyze American put options in a hyper-exponential jump-diffusion model. Our contribution is threefold. Firstly, by following a maturity randomization approach, we solve the partial integro-differential equation and obtain a tight lower bound for the American option price. Secondly, our method allows us to disentangle the contributions of jump and diffusion for the American early exercise premium. Finally, using American-style options on S&P 100 index from 2007 until 2013, we estimate a range of hyper-exponential specifications and investigate the implications for option pricing and jump-diffusion disentanglement. We find that jump risk accounts for a large part of early exercise premium.

Keywords: American options; early exercise premium; hyper-exponential jump-diffusion model; maturity randomization; jump-diffusion disentanglement (search for similar items in EconPapers)
JEL-codes: C51 C52 C61 G01 G12 G13 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2015-02, Revised 2015-03
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Pricing and disentanglement of American puts in the hyper-exponential jump-diffusion model (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1508

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