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Pricing and Disentanglement of American Puts in the Hyper-Exponential Jump-Diffusion Model


Leippold, Markus; Vasiljevic, Nikola (2017). Pricing and Disentanglement of American Puts in the Hyper-Exponential Jump-Diffusion Model. Journal of Banking and Finance, 77:78-94.

Abstract

We analyze American put options in a hyper-exponential jump-diffusion model. Our contribution is threefold. Firstly, by following a maturity randomization approach, we solve the partial integro-differential equation and obtain a tight lower bound for the American option price. Secondly, our method allows us to disentangle the contributions of jump and diffusion for the American early exercise premium. Finally, using American-style options on S\&P 100 index from 2007 until 2013, we estimate a range of hyper-exponential specifications and investigate the implications for option pricing and jump-diffusion disentanglement. We find that jump risk accounts for a large part of early exercise premium.

Abstract

We analyze American put options in a hyper-exponential jump-diffusion model. Our contribution is threefold. Firstly, by following a maturity randomization approach, we solve the partial integro-differential equation and obtain a tight lower bound for the American option price. Secondly, our method allows us to disentangle the contributions of jump and diffusion for the American early exercise premium. Finally, using American-style options on S\&P 100 index from 2007 until 2013, we estimate a range of hyper-exponential specifications and investigate the implications for option pricing and jump-diffusion disentanglement. We find that jump risk accounts for a large part of early exercise premium.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:April 2017
Deposited On:22 Nov 2017 14:21
Last Modified:19 Feb 2018 09:22
Publisher:Elsevier
ISSN:0378-4266
OA Status:Closed
Publisher DOI:https://doi.org/10.1016/j.jbankfin.2017.01.014
Related URLs:http://www.sciencedirect.com/science/article/pii/S0378426617300146 (Publisher)
https://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2571208 (Organisation)
Other Identification Number:merlin-id:14475

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