Option Pricing Under a Double Exponential Jump Diffusion Model

21 Pages Posted: 24 Sep 2001

See all articles by Steven Kou

Steven Kou

Boston University

Hui Wang

Brown University

Date Written: September 2001

Abstract

The double exponential jump diffusion model is one of the models that has been proposed to incorporate the leptokurtic feature (meaning having both high peak and heavy tails in asset return distributions) and the volatility smile. This paper demonstrates that, unlike many other models, the double exponential jump diffusion model can lead to analytical tractability for path-dependent options. Obtained are closed form solutions for perpetual American options, as well as the Laplace transforms of lookback options and barrier options. Numerical examples indicate that the formulae are easily implemented.

JEL Classification: G12, G13, C68

Suggested Citation

Kou, Steven and Wang, Hui, Option Pricing Under a Double Exponential Jump Diffusion Model (September 2001). Available at SSRN: https://ssrn.com/abstract=284202 or http://dx.doi.org/10.2139/ssrn.284202

Steven Kou (Contact Author)

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
6173583318 (Phone)

Hui Wang

Brown University ( email )

Box 1860
Providence, RI 02912
United States

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