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Coupling and Option Price Comparisons in a Jump-Diffusion model

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  • Vicky Henderson
  • David Hobson

Abstract

In this paper we examine the dependence of option prices in a general jump-diffusion model on the choice of martingale pricing measure. Since the model is incomplete there are many equivalent martingale measures. Each of these measures corresponds to a choice for the market price of diffusion risk and the market price of jump risk. Our main result is to show that for conves payoffs the option price is increasing in the the jump-risk parameter. We apply this result to deduce general inequalities comparing the prices of contingent claims under various martingale measures which have been propsed in the literature as candidate pricing measures. Our proods are based on couplings of stochastic processes. If there is only one possible jump size then we are able to utilize a second coupling to extend our results to include stochastic jump intensities.

Suggested Citation

  • Vicky Henderson & David Hobson, 2002. "Coupling and Option Price Comparisons in a Jump-Diffusion model," OFRC Working Papers Series 2002mf01, Oxford Financial Research Centre.
    • Handle: RePEc:sbs:wpsefe:2002mf01
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    File URL: http://www.finance.ox.ac.uk/file_links/finecon_papers/2002mf01.pdf
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    Cited by:

    1. George M. Mukupa & Elias R. Offen, 2020. "The Semimartingale Equilibrium Risk Premium for a Risk Seeking Investor," Journal of Mathematics Research, Canadian Center of Science and Education, vol. 12(4), pages 1-13, August.

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