Option Pricing with Stochastic Volatility and Jump Diffusion Processes
Option pricing by the use of Black Scholes Merton (BSM) model is based on the assumption that asset prices have a lognormal distribution. In spite of the use of these models on a large scale, both by practioners and academics, the assumption of lognormality is rejected by the history of returns. The...
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| Format: | Article |
| Language: | English |
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General Association of Economists from Romania
2006-05-01
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| Series: | Theoretical and Applied Economics |
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| Online Access: | http://www.ectap.ro/articole/65.pdf |
| _version_ | 1818546254672560128 |
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| author | Radu Lupu |
| author_facet | Radu Lupu |
| author_sort | Radu Lupu |
| collection | DOAJ |
| description | Option pricing by the use of Black Scholes Merton (BSM) model is based on the assumption that asset prices have a lognormal distribution. In spite of the use of these models on a large scale, both by practioners and academics, the assumption of lognormality is rejected by the history of returns. The objective of this article is to present the methods that developed after the Black Scholes Merton environment and deals with the option pricing model adjustment to the empirical properties of asset returns. The main models that appeared after BSM allowed for special changes of the returns that materialized in jump-diffusion and stochastic volatility processes. The article presents the foundations of risk neutral options evaluation and the empirical evidence that fed the amendment of the lognormal assumption in the first part and shows the evaluation procedure under the assumption of stock prices following the jump-diffusion process and the stochastic volatility process. |
| first_indexed | 2024-12-12T07:50:44Z |
| format | Article |
| id | doaj.art-acec480b1e6a4382a5e477f4c3247d6d |
| institution | Directory Open Access Journal |
| issn | 1841-8678 |
| language | English |
| last_indexed | 2024-12-12T07:50:44Z |
| publishDate | 2006-05-01 |
| publisher | General Association of Economists from Romania |
| record_format | Article |
| series | Theoretical and Applied Economics |
| spelling | doaj.art-acec480b1e6a4382a5e477f4c3247d6d2022-12-22T00:32:27ZengGeneral Association of Economists from RomaniaTheoretical and Applied Economics1841-86782006-05-013(498)3(498)125130Option Pricing with Stochastic Volatility and Jump Diffusion ProcessesRadu LupuOption pricing by the use of Black Scholes Merton (BSM) model is based on the assumption that asset prices have a lognormal distribution. In spite of the use of these models on a large scale, both by practioners and academics, the assumption of lognormality is rejected by the history of returns. The objective of this article is to present the methods that developed after the Black Scholes Merton environment and deals with the option pricing model adjustment to the empirical properties of asset returns. The main models that appeared after BSM allowed for special changes of the returns that materialized in jump-diffusion and stochastic volatility processes. The article presents the foundations of risk neutral options evaluation and the empirical evidence that fed the amendment of the lognormal assumption in the first part and shows the evaluation procedure under the assumption of stock prices following the jump-diffusion process and the stochastic volatility process.http://www.ectap.ro/articole/65.pdfoption pricingjump-diffusion processesstochastic volatility processes |
| spellingShingle | Radu Lupu Option Pricing with Stochastic Volatility and Jump Diffusion Processes Theoretical and Applied Economics option pricing jump-diffusion processes stochastic volatility processes |
| title | Option Pricing with Stochastic Volatility and Jump Diffusion Processes |
| title_full | Option Pricing with Stochastic Volatility and Jump Diffusion Processes |
| title_fullStr | Option Pricing with Stochastic Volatility and Jump Diffusion Processes |
| title_full_unstemmed | Option Pricing with Stochastic Volatility and Jump Diffusion Processes |
| title_short | Option Pricing with Stochastic Volatility and Jump Diffusion Processes |
| title_sort | option pricing with stochastic volatility and jump diffusion processes |
| topic | option pricing jump-diffusion processes stochastic volatility processes |
| url | http://www.ectap.ro/articole/65.pdf |
| work_keys_str_mv | AT radulupu optionpricingwithstochasticvolatilityandjumpdiffusionprocesses |