The Impact of Jumps on American Option Pricing: The S&P 100 Options Case
Christina Nikitopoulos-Sklibosios (),
Erik Schlogl () and
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Blessing Taruvinga: Finance Discipline Group, UTS Business School, University of Technology Sydney, http://www.uts.edu.au/about/uts-business-school/finance
No 397, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney
This paper analyzes the importance of asset and volatility jumps in American option pricing models. Using the Heston (1993) stochastic volatility model with asset and volatility jumps and the Hull and White (1987) short rate model, American options are numerically evaluated by the Method of Lines. The calibration of these models to S&P 100 American options data reveals that jumps, especially asset jumps, play an important role in improving the models’ ability to fit market data. Further, asset and volatility jumps tend to lift the free boundary, an effect that augments during volatile market conditions, while the additional volatility jumps marginally drift down the free boundary. As markets turn more volatile and exhibit jumps, American option holders become more prudent with their exercise decisions, especially as maturity of the options approaches.
Keywords: American options; S&P 100 options; Method of Lines; asset jumps; volatility jumps; stochastic interest rate (search for similar items in EconPapers)
JEL-codes: C60 G13 (search for similar items in EconPapers)
Pages: 50 pages
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Persistent link: https://EconPapers.repec.org/RePEc:uts:rpaper:397
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