On the calculation of price sensitivities with jump-diffusion structure

Youssef El-Khatib and Abdulnasser Hatemi-J

MPRA Paper from University Library of Munich, Germany

Abstract: We provide a new theoretical framework for estimating the price sensitivities of a trading position with regard to five underlying factors in jump-diffusion models using jump times Poisson noise. The proposition that results in a general solution is mathematically proved. The general solution that this paper offers can be applied to compute each price sensitivity. The suggested modeling approach deals with the shortcomings of the Black-Scholes formula such as the jumps that can occur at any time in the stock's price. Via the Malliavin calculus we show that differentiation can be transformed into integration, which makes the price sensitivities operational and more efficient. Thus, the solution that is provided in this paper is expected to make decision making under uncertainty more efficient.

Keywords: Malliavin Calculus; Asset Pricing; Price Sensitivity; Jump-diffusion Models; Jump Times Poisson Noise; European Options. (search for similar items in EconPapers)
JEL-codes: C60 G10 G12 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (2)

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https://mpra.ub.uni-muenchen.de/45328/1/MPRA_paper_30596.pdf revised version (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:30596

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