Option valuation with liquidity risk and jumps
نویسندگان
چکیده
5 ABSTRACT This article provides a simple model for pricing and hedging options in the presence of jumps and liquidity costs. In the article, liquidity risk is modelled via a stochastic supply curve function and a jump-diffusion process is approximated by a Markov chain. Local risk minimization incorporating liquidity risk is proposed to price and hedge European options in this discrete10 time model. Moreover, an example is provided to implement the modified risk minimization method and to demonstrate the performance of hedging strategies. ARTICLE HISTORY Received 23 August 2016 Accepted 25 April 2017
منابع مشابه
Exploring Time-Varying Jump Intensities: Evidence from S&P500 Returns and Options
Standard empirical investigations of jump-dynamics in return and volatility are fairly complicated due to the presence of multiple latent continuous-time factors. We present a new discrete-time framework that combines GARCH processes with rich specifications of jumps in returns and volatility. Our models can be estimated with ease using standard maximum likelihood techniques. We provide a tract...
متن کاملGeometric asian option pricing in general affine stochastic volatility models with jumps
In this paper we present some results on Geometric Asian option valuation for affine stochastic volatility models with jumps. We shall provide a general framework into which several different valuation problems based on some average process can be cast, and we shall obtain close-form solutions for some relevant affine model classes.
متن کاملTransform Analysis and Asset
In the setting of ‘‘affine’’ jump-diffusion state processes, this paper provides an analytical treatment of a class of transforms, including various Laplace and Fourier transforms as special cases, that allow an analytical treatment of a range of valuation and econometric problems. Example applications include fixed-income pricing models, with a role for intensity-based models of default, as we...
متن کاملOption Pricing in the Presence of Operational Risk
In this paper we distinguish between operational risks depending on whether the operational risk naturally arises in the context of model risk. As the pricing model exposes itself to operational errors whenever it updates and improves its investment model and other related parameters. In this case, it is no longer optimal to implement the best model. Generally, an option is exercised in a jump-...
متن کاملJump and Volatility Risk Premiums Implied by VIX
An estimation method is developed for extracting the latent stochastic volatility from VIX, a volatility index for the S&P 500 index return produced by the Chicago Board Options Exchange (CBOE) using the so-called model-free volatility construction. Our model specification encompasses all mean-reverting stochastic volatility option pricing models with a constant-elasticity of variance and those...
متن کامل