Option pricing under the double exponential jump‐diffusion model with stochastic volatility and interest rate

Chen, R, Li, Z, Zeng, L, Yu, L, Qi, L and Liu, JL ORCID: 0000-0002-2978-6022 2017, 'Option pricing under the double exponential jump‐diffusion model with stochastic volatility and interest rate' , Journal of Management Science and Engineering, 2 (4) , pp. 252-289.

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Abstract

This paper proposes an efficient option pricing model that incorporates stochastic interest rate (SIR), stochastic volatility (SV), and double exponential jump into the jump‐diffusion settings. The model comprehensively considers the leptokurtosis and heteroscedasticity of the underlying asset’s returns, rare events, and an SIR. Using the model, we deduce the pricing characteristic function and pricing formula of a European option. Then, we develop the Markov chain Monte Carlo method with latent variable to solve the problem of parameter estimation under the double exponential jump‐diffusion model with SIR and SV. For verification purposes, we conduct time efficiency analysis, goodness of fit analysis, and jump/drift term analysis of the proposed model. In addition, we compare the pricing accuracy of the proposed model with those of the Black–Scholes and the Kou (2002) models. The empirical results show that the proposed option pricing model has high time efficiency, and the goodness of fit and pricing accuracy are significantly higher than those of the other two models.

Item Type: Article
Schools: Schools > Salford Business School > Salford Business School Research Centre
Journal or Publication Title: Journal of Management Science and Engineering
Publisher: Science Press
ISSN: 2096-2320
Related URLs:
Depositing User: A Johnson
Date Deposited: 03 Jan 2018 12:58
Last Modified: 07 Dec 2018 06:20
URI: http://usir.salford.ac.uk/id/eprint/44888

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