Jump-Diffusion Option Pricing without IID Jumps

68 Pages Posted: 14 Oct 2008

See all articles by Antonio Camara

Antonio Camara

Oklahoma State University, Stillwater - College of Business Administration

Weiping Li

Civil Aviation Flight University of China ; Oklahoma State University

Date Written: October 12, 2008

Abstract

This paper investigates how violations of the assumption that jumps are identically and independently distributed (IID) affect option prices. We characterize several types of IID jumps violations including jumps with time-varying means, time-varying variances, and time-varying autocorrelations. We also analyze the combined effect of these violations on option prices. These IID violations affect option prices in different ways. Different effects of IID violations can either offset each other to eliminate the effect of isolated IID violations or can act as leverages increasing the magnitude of mispricing created by a single violation of the IID assumption. Our investigation is performed inside a new framework for the pricing of options that relaxes the assumption that jumps are IID. We derive three families of jump-diffusion option pricing formulae without IID jumps.

Suggested Citation

Camara, Antonio and Li, Weiping, Jump-Diffusion Option Pricing without IID Jumps (October 12, 2008). Available at SSRN: https://ssrn.com/abstract=1282882 or http://dx.doi.org/10.2139/ssrn.1282882

Antonio Camara (Contact Author)

Oklahoma State University, Stillwater - College of Business Administration ( email )

201 Business
Stillwater, OK 74078-0555
United States

Weiping Li

Civil Aviation Flight University of China ( email )

46 Nanchang road
Guanghan, Sichuan 618307
China

Oklahoma State University ( email )

Stillwater, OK
United States

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