Market complete option valuation using a Jarrow-Rudd pricing tree with skewness and kurtosis

Applying the Cherny-Shiryaev-Yor invariance principle, we introduce a generalized Jarrow-Rudd (GJR) option pricing model with uncertainty driven by skew random walk. The GJR tree exhibits skewness and kurtosis in both natural risk-neutral world. We construct implied surfaces for parameters determining tree. Motivated Merton’s incorporating transaction costs, extend to include hedging cost. demonstrate ways fit market driver that influences price dynamics of underlying asset. supplement our findings numerical examples.