IDEAS home Printed from https://ideas.repec.org/a/fec/journl/v11y2016i3p439-467.html
   My bibliography  Save this article

Option Pricing Based on Alternative Jump Size Distributions

Author

Listed:
  • Jian Chen

    (School of Economics, Xiamen University, Xiamen 361005, China)

  • Chenghu Ma

    (School of Management, Fudan University, Shanghai 200433, China)

Abstract

It is well known that volatility smirks and heavy-tailed asset return distributions are two violations of the Black-Scholes model. This paper investigates the role of jump size distribution played in explaining these two abnormalities. We consider a jump-diffusion model with Laplace jump size distribution, in comparison to the conventional normal distribution. In addition, our analysis is built upon a pure exchange economy, in which the representative agent¡¯s risk preference shows a fanning characteristic. We find that, when a fanning effect is present, Laplace model produces a more remarkable leptokurtic pattern of the risk-neutral distribution implied by options, as well as generating more pronounced volatility smirks than the normal model.

Suggested Citation

  • Jian Chen & Chenghu Ma, 2016. "Option Pricing Based on Alternative Jump Size Distributions," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 11(3), pages 439-467, September.
    • Handle: RePEc:fec:journl:v:11:y:2016:i:3:p:439-467
    as

    Download full text from publisher

    File URL: http://journal.hep.com.cn/fec/EN/10.3868/s060-005-016-0024-0
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jordan, Matthias & Millinger, Markus & Thrän, Daniela, 2020. "Robust bioenergy technologies for the German heat transition: A novel approach combining optimization modeling with Sobol’ sensitivity analysis," Applied Energy, Elsevier, vol. 262(C).

    More about this item

    Keywords

    general equilibrium; recursive utility; option pricing; Laplace distribution; volatility smirk;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fec:journl:v:11:y:2016:i:3:p:439-467. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Frank H. Liu (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.