Option Pricing for a Jump-Diffusion Model with General Discrete Jump-Size Distributions

We obtain a closed-form solution for pricing European options under a general jump-diffusion model that can incorporate arbitrary discrete jump-size distributions, including nonparametric distributions such as an empirical distribution. The flexibility in the jump-size distribution allows the model to better capture leptokurtic features found in real-world data. The model uses a discrete-time framework and leads to a pricing formula that is provably convergent to the continuous-time price as the discretization is increased. The solution is easy to implement with fast convergence properties. Numerical results illustrate the efficiency and accuracy of the proposed model and highlight its robustness and flexibility. This paper was accepted by Noah Gans, stochastic models and simulation.

• 저널Management Science · 63(11) · 3961–3977
• 토픽Stochastic processes and financial applications · Finance
• DOI10.1287/mnsc.2016.2522
• 저자Michael C. Fu, Bingqing Li, Guozhen Li, Rongwen Wu