Skip to main navigation Skip to search Skip to main content

Stochastic volatility double-jump-diffusions model: the importance of distribution type of jump amplitude

  • Guangdong University of Technology

Research output: Contribution to journal › Article › peer-review

5 Scopus citations

Abstract

This research examines whether there exists an appealing distribution for random jump amplitude, in the sense that with which the stochastic volatility double-jump-diffusions (SVJJ) model would potentially have a superior option market fit, meanwhile keeping a sound balance between reality and tractability. We provide a general methodology for pricing vanilla options, using the Fourier cosine series expansion method (i.e. the COS formula, see [F. Fang and C.W. Oosterlee, A novel pricing method for European based on Fourier-cosine series expansions, SIAM J. Sci. Comput. 31 (2008), pp. 826–848], in the setting of Heston's SVJJ (HSVJJ) model that may allow a range of jump amplitude distributions, including the normal distribution, the exponential distribution and the asymmetric double-exponential (db-E) distribution as special cases. An illustrative example examines the implications of HSVJJ model in capturing option ‘smirks’. This example highlights the impacts on implied volatility surface of various jump amplitude distributions, through both extensive model calibrations and implied-volatility impacting experiments. Numerical results show that, with the db-E distribution, the HSVJJ model not only captures the implied volatility smile and smirk, but also the ‘sadness’.

Original languageEnglish
Pages (from-to)989-1014
Number of pages26
JournalInternational Journal of Computer Mathematics
Volume94
Issue number5
DOIs
StatePublished - 4 May 2017

Keywords

  • Fourier cosine method
  • Heston
  • exponential distribution
  • jump-diffusion
  • volatility sadness
  • volatility smile/smirk

Fingerprint

Dive into the research topics of 'Stochastic volatility double-jump-diffusions model: the importance of distribution type of jump amplitude'. Together they form a unique fingerprint.

Cite this