Decomposition formula for jump diffusion models
The result's identifiers
Result code in IS VaVaI
<a href="https://www.isvavai.cz/riv?ss=detail&h=RIV%2F49777513%3A23520%2F18%3A43930096" target="_blank" >RIV/49777513:23520/18:43930096 - isvavai.cz</a>
Result on the web
<a href="https://doi.org/10.1142/S0219024918500528" target="_blank" >https://doi.org/10.1142/S0219024918500528</a>
DOI - Digital Object Identifier
<a href="http://dx.doi.org/10.1142/S0219024918500528" target="_blank" >10.1142/S0219024918500528</a>
Alternative languages
Result language
angličtina
Original language name
Decomposition formula for jump diffusion models
Original language description
In this paper we derive a generic decomposition of the option pricing formula for models with finite activity jumps in the underlying asset price process (SVJ models). This is an extension of the well-known result by Alos (2012) for Heston (1993) SV model. Moreover, explicit approximation formulas for option prices are introduced for a popular class of SVJ models - models utilizing a variance process postulated by Heston (1993). In particular, we inspect in detail the approximation formula for the Bates (1996) model with log-normal jump sizes and we provide a numerical comparison with the industry standard - Fourier transform pricing methodology. For this model, we also reformulate the approximation formula in terms of implied volatilities. The main advantages of the introduced pricing approximations are twofold. Firstly, we are able to significantly improve computation efficiency (while preserving reasonable approximation errors) and secondly, the formula can provide an intuition on the volatility smile behaviour under a specific SVJ model.
Czech name
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Czech description
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Classification
Type
J<sub>imp</sub> - Article in a specialist periodical, which is included in the Web of Science database
CEP classification
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OECD FORD branch
10102 - Applied mathematics
Result continuities
Project
<a href="/en/project/GA18-16680S" target="_blank" >GA18-16680S: Rough models of fractional stochastic volatility</a><br>
Continuities
P - Projekt vyzkumu a vyvoje financovany z verejnych zdroju (s odkazem do CEP)
Others
Publication year
2018
Confidentiality
S - Úplné a pravdivé údaje o projektu nepodléhají ochraně podle zvláštních právních předpisů
Data specific for result type
Name of the periodical
International Journal of Theoretical and Applied Finance
ISSN
0219-0249
e-ISSN
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Volume of the periodical
21
Issue of the periodical within the volume
8
Country of publishing house
SG - SINGAPORE
Number of pages
36
Pages from-to
1850052-1-1850052-36
UT code for WoS article
000455592700004
EID of the result in the Scopus database
2-s2.0-85056101528