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The importance of jumps in pricing European options

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  • Campolongo, F.
  • Cariboni, J.
  • Schoutens, W.

Abstract

The screening method proposed by Morris [Factorial sampling plans for preliminary computational experiments. Technometrics 1991;33:161–74] and recently improved by Campolongo et al. [Using an enhanced Morris method to assess the sensitivity of a large chemical reaction model. 2005, under revision.] has been employed to estimate the importance of the inclusion of jumps in a model for pricing European options. Results confirm that, among the sources of uncontrollable uncertainty, jumps play a major role and therefore need to be better investigated in order to improve the accuracy of the model predictions. The importance of jumps is more pronounced for higher option strike prices, which is when the option is “out of the money†.

Suggested Citation

  • Campolongo, F. & Cariboni, J. & Schoutens, W., 2006. "The importance of jumps in pricing European options," Reliability Engineering and System Safety, Elsevier, vol. 91(10), pages 1148-1154.
    • Handle: RePEc:eee:reensy:v:91:y:2006:i:10:p:1148-1154
    DOI: 10.1016/j.ress.2005.11.016
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    References listed on IDEAS

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    1. Bakshi, Gurdip & Cao, Charles & Chen, Zhiwu, 1997. "Empirical Performance of Alternative Option Pricing Models," Journal of Finance, American Finance Association, vol. 52(5), pages 2003-2049, December.
    2. Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," The Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-343.
    3. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
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    Cited by:

    1. J. Beirlant & G. Claeskens & C. Croux & H. Degryse & H. Dewachter & G. Dhaene & J. Dhaene & I. Gijbels & M. Goovaerts & M. Hubert & F. Roodhooft & W. Schouten & M. Willekens, 2005. "Managing Uncertainty: Financial, Actuarial and Statistical Modeling," Review of Business and Economic Literature, KU Leuven, Faculty of Economics and Business (FEB), Review of Business and Economic Literature, vol. 0(1), pages 23-48.
    2. Jan Pospíšil & Tomáš Sobotka & Philipp Ziegler, 2019. "Robustness and sensitivity analyses for stochastic volatility models under uncertain data structure," Empirical Economics, Springer, vol. 57(6), pages 1935-1958, December.
    3. Jan Posp'iv{s}il & Tom'av{s} Sobotka & Philipp Ziegler, 2019. "Robustness and sensitivity analyses for stochastic volatility models under uncertain data structure," Papers 1912.06709, arXiv.org.

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