Download this Paper Open PDF in Browser

Exact and Approximated Option Pricing in a Stochastic Volatility Jump-Diffusion Model

M. Corazza et al. (eds.), Mathematical and Statistical Methods for Actuarial Sciences and Finance 2010, pp 133-142

10 Pages Posted: 11 Jul 2014  

Fernanda D'Ippoliti

Independent

Enrico Moretto

University of Insubria - Department of Economics; CNR - IMATI

Sara Pasquali

CNR-IMATI

Barbara Trivellato

Polytechnic University of Turin - Dipartimento di Matematica

Date Written: July 9, 2008

Abstract

We propose a stochastic volatility jump-diffusion model for option pricing with contemporaneous jumps in both spot return and volatility dynamics. The model admits, in the spirit of Heston, a closed-form solution for European-style options. To evaluate more complex derivatives for which there is no explicit pricing expression, such as barrier options, a numerical methodology, based on an “exact algorithm” proposed by Broadie and Kaya, is applied. This technique is called exact as no discretisation of dynamics is required. We end up testing the goodness of our methodology using, as real data, prices and implied volatilities from the DJ Euro Stoxx 50 market and providing some numerical results for barrier options and their Greeks.

Keywords: stochastic volatility jump-diffusion models, barrier option pricing, rejection sampling

JEL Classification: G13

Suggested Citation

D'Ippoliti, Fernanda and Moretto, Enrico and Pasquali, Sara and Trivellato, Barbara, Exact and Approximated Option Pricing in a Stochastic Volatility Jump-Diffusion Model (July 9, 2008). M. Corazza et al. (eds.), Mathematical and Statistical Methods for Actuarial Sciences and Finance 2010, pp 133-142. Available at SSRN: https://ssrn.com/abstract=2464176

Fernanda D'Ippoliti

Independent ( email )

No Address Available

Enrico Moretto (Contact Author)

University of Insubria - Department of Economics ( email )

Via Ravasi 2
Varese, 21100
Italy

CNR - IMATI ( email )

via Bassini 15
Milano, 20133
Italy

Sara Pasquali

CNR-IMATI ( email )

via Bassini 15
Milano, 20133
Italy

Barbara Trivellato

Polytechnic University of Turin - Dipartimento di Matematica ( email )

Corso Duca degli Abruzzi, 24
Torino, Torino 10129
Italy

Paper statistics

Downloads
23
Abstract Views
172