M. Corazza et al. (eds.), Mathematical and Statistical Methods for Actuarial Sciences and Finance 2010, pp 133-142
10 Pages Posted: 11 Jul 2014
Date Written: July 9, 2008
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: 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