Option Pricing Based on Alternative Jump Size Distributions

Jian Chen, Chenghu Ma

PDF(1006 KB)
PDF(1006 KB)
Front. Econ. China ›› 2016, Vol. 11 ›› Issue (3) : 439-467. DOI: 10.3868/s060-005-016-0024-0
Orginal Article
Orginal Article

Option Pricing Based on Alternative Jump Size Distributions

Author information +
History +

Abstract

It is well known that volatility smirks and heavy-tailed asset return distributions are two violations of the Black-Scholes model. This paper investigates the role of jump size distribution played in explaining these two abnormalities. We consider a jump-diffusion model with Laplace jump size distribution, in comparison to the conventional normal distribution. In addition, our analysis is built upon a pure exchange economy, in which the representative agent’s risk preference shows a fanning characteristic. We find that, when a fanning effect is present, Laplace model produces a more remarkable leptokurtic pattern of the risk-neutral distribution implied by options, as well as generating more pronounced volatility smirks than the normal model.

Keywords

general equilibrium / recursive utility / option pricing / Laplace distribution / volatility smirk

Cite this article

Download citation ▾
Jian Chen, Chenghu Ma. Option Pricing Based on Alternative Jump Size Distributions. Front. Econ. China, 2016, 11(3): 439‒467 https://doi.org/10.3868/s060-005-016-0024-0

RIGHTS & PERMISSIONS

2016 Higher Education Press
PDF(1006 KB)

Accesses

Citations

Detail

Sections
Recommended

/