Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5084927 | International Review of Financial Analysis | 2014 | 8 Pages |
Abstract
The purpose of this paper is to introduce a stochastic volatility model for option pricing that exhibits Lévy jump behavior. For this model, we derive the general formula for a European call option. A well known particular case of this class of models is the Bates model, for which the jumps are modeled by a compound Poisson process with normally distributed jumps. Alternatively, we turn our attention to infinite activity jumps produced by a tempered stable process. Then we empirically compare the estimated log-return probability density and the option prices produced from this model to both the Bates model and the Black-Scholes model. We find that the tempered stable jumps describe more precisely market prices than compound Poisson jumps assumed in the Bates model.
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
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Authors
Tsvetelin S. Zaevski, Young Shin Kim, Frank J. Fabozzi,