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Option Pricing For Truncated Lévy Processes

Author

Listed:
  • SVETLANA I. BOYARCHENKO

    (Department of Economics, University of Pennsylvania, 3718 Locust Walk, Philadelphia, PA-19104, USA)

  • SERGEI Z. LEVENDORSKIǏ

    (Rostov State Academy of Economy, 69, B. Sadovaya, Rostov-on-Don, 344007, Russia)

Abstract

A general class of truncated Lévy processes is introduced, and possible ways of fitting parameters of the constructed family of truncated Lévy processes to data are discussed. For a market of a riskless bond and a stock whose log-price follows a truncated Lévy process, TLP-analogs of the Black–Scholes equation, the Black–Scholes formula, the Dynkin derivative and the Leland's model are obtained, a locally risk-minimizing portfolio is constructed, and an optimal exercise price for a perpetual American put is computed.

Suggested Citation

  • Svetlana I. Boyarchenko & Sergei Z. Levendorskiǐ, 2000. "Option Pricing For Truncated Lévy Processes," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 3(03), pages 549-552.
    • Handle: RePEc:wsi:ijtafx:v:03:y:2000:i:03:n:s0219024900000541
    DOI: 10.1142/S0219024900000541
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