Asymptotic Pricing in Term Structure Models Driven by Jump-Diffusions of Ornstein-Uhlenbeck Type

27 Pages Posted: 14 Mar 2006

See all articles by Nina Boyarchenko

Nina Boyarchenko

Federal Reserve Bank of New York

Sergei Levendorskii

Calico Science Consulting

Date Written: March 14, 2006

Abstract

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

Suggested Citation

Boyarchenko, Nina and Levendorskii, Sergei Z., Asymptotic Pricing in Term Structure Models Driven by Jump-Diffusions of Ornstein-Uhlenbeck Type (March 14, 2006). Available at SSRN: https://ssrn.com/abstract=890725 or http://dx.doi.org/10.2139/ssrn.890725

Nina Boyarchenko

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-7339 (Phone)
212-720-1582 (Fax)

Sergei Z. Levendorskii (Contact Author)

Calico Science Consulting ( email )

Austin, TX
United States

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