“Analytical Option Pricing under an Asymmetrically Displaced Double Gamma Jump-Diffusion Model” (2013), joint with Ally Quan Zhang
Abstract:
We generalize the Kou (2002) double exponential jump-diffusion model in two directions. First, we independently displace the two tails of the jump size distribution away from the origin. Second, we allow for each of the displaced tails to follow a gamma distribution with an integer-valued shape parameter. Both extensions introduce additional flexibility in the tails of the corresponding return distribution. Our model is supported by an equilibrium economy and we obtain closed-form solutions for European plain vanilla options. Our valuation function is computationally fast to evaluate and robust across the full parameter space. We estimate the physical model parameters through maximum likelihood and for a diverse sample of equities, commodities and exchange rates. For all assets under consideration, the original Kou (2002) model can be rejected in favor of our newly introduced asymmetrically displaced double gamma dynamics.
Available at SSRN: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2311673
Presented or Accepted for Presentation at:
- 2014 FMA European Conference, June 2014, Maastricht
- 8th World Congress of the Bachelier Finance Society, June 2014, Brussels
- 17th Annual Conference of the Swiss Society for Financial Market Research, April 2014, Zürich
- 50th Anniversary Meeting of the Eastern Finance Association, April 2014, Pittsburgh
— The Chicago Trading Company Outstanding Paper in Derivatives Award — - Southwestern Finance Association 2014 Annual Conference, March 2014, Dallas
- 11th German Probability and Statistics Days, March 2014, Ulm
- Advances in Computational Economics and Finance, March 2014, Zürich
- Institute for Banking & Finance Brown Bag Seminar, March 2014, Zürich
- 26th Australasian Finance & Banking Conference, December 2013, Sydney
- University of New South Wales Brown Bag Seminar, April 2013, Sydney
Additional Resources:
- blog entry: FAQs for the AD-DG model
- blog entry: stochastic volatility with AD-DG jumps