Option Pricing with Levy Process

LSE Working Paper

22 Pages Posted: 16 Apr 2001  

Eric Benhamou

Université Paris Est - Université Paris Est-Creteil

Date Written: July 11, 2000

Abstract

In this paper, we assume that log returns can be modelled by a Levy process. We give explicit formulae for option prices by means of the Fourier transform. We explain how to infer the characteristics of the Levy process from option prices.
This enables us to generate an implicit volatility surface implied by market data. This model is of particular interest since it extends the seminal Black Scholes [1973] model consistently with volatility smile.

Keywords: Levy process, Fourier and Laplace transform, Smile

JEL Classification: G13

Suggested Citation

Benhamou, Eric, Option Pricing with Levy Process (July 11, 2000). LSE Working Paper. Available at SSRN: https://ssrn.com/abstract=265685 or http://dx.doi.org/10.2139/ssrn.265685

Eric Benhamou (Contact Author)

Université Paris Est - Université Paris Est-Creteil ( email )

61 avenue du Général de Gaulle
Créteil, 940000
France

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