Asymptotic Pricing in Term Structure Models Driven by Jump-Diffusions of Ornstein-Uhlenbeck Type
27 Pages Posted: 14 Mar 2006
Date Written: March 14, 2006
Perturbation approach to pricing of contingent claims in affine and quadratic term structure models driven by processes Ornstein-Uhlenbeck type, with small jump components, is developed. For contingent claims of short maturity, the leading term and correction terms are calculated using the Fourier transform method, and for options of longer maturities, the asymptotic formulas are based on the eigenfunction expansion. We study the dependence of Black implied volatilities and option prices on the type of non-Gaussian innovations, and the influence of jumps on prices of contingent claims of long maturities.
Keywords: Term structure models, Ornstein-Uhlenbeck processes, jump diffusions, derivative pricing, eigenfunction expansion, perturbation theory, asymptotic solutions
JEL Classification: G12, G13, C60
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