Pricing and Disentanglement of American Puts in the Hyper-Exponential Jump-Diffusion Model

43 Pages Posted: 3 Mar 2015 Last revised: 4 Mar 2015

See all articles by Markus Leippold

Markus Leippold

University of Zurich; Swiss Finance Institute

Nikola Vasiljevic

University of Zurich, Department of Banking and Finance

Date Written: February 21, 2015

Abstract

We analyze American put options in a hyper-exponential jump-diffusion model. Our contribution is threefold. Firstly, by following a maturity randomization approach, we solve the partial integro-differential equation and obtain a tight lower bound for the American option price. Secondly, our method allows us to disentangle the contributions of jump and diffusion for the American early exercise premium. Finally, using American-style options on S&P 100 index from 2007 until 2013, we estimate a range of hyper-exponential specifications and investigate the implications for option pricing and jump-diffusion disentanglement. We find that jump risk accounts for a large part of early exercise premium.

Keywords: American options, early exercise premium, hyper-exponential jump-diffusion model, maturity randomization, jump-diffusion disentanglement.

JEL Classification: G01, G12, G13, C51, C52, C61.

Suggested Citation

Leippold, Markus and Vasiljevic, Nikola, Pricing and Disentanglement of American Puts in the Hyper-Exponential Jump-Diffusion Model (February 21, 2015). Swiss Finance Institute Research Paper No. 15-08, Available at SSRN: https://ssrn.com/abstract=2571208 or http://dx.doi.org/10.2139/ssrn.2571208

Markus Leippold

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Nikola Vasiljevic (Contact Author)

University of Zurich, Department of Banking and Finance ( email )

Plattenstrasse 14
Zurich, CH-8032
Switzerland

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