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Frontiers of Economics in China

ISSN 1673-3444

ISSN 1673-3568(Online)

CN 11-5744/F

Postal Subscription Code 80-978

Front. Econ. China    2016, Vol. 11 Issue (3) : 439-467    https://doi.org/10.3868/s060-005-016-0024-0
Orginal Article |
Option Pricing Based on Alternative Jump Size Distributions
Jian Chen1(),Chenghu Ma2()
1. School of Economics, Xiamen University, Xiamen 361005, China
2. School of Management, Fudan University, Shanghai 200433, China
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Abstract

It is well known that volatility smirks and heavy-tailed asset return distributions are two violations of the Black-Scholes model. This paper investigates the role of jump size distribution played in explaining these two abnormalities. We consider a jump-diffusion model with Laplace jump size distribution, in comparison to the conventional normal distribution. In addition, our analysis is built upon a pure exchange economy, in which the representative agent’s risk preference shows a fanning characteristic. We find that, when a fanning effect is present, Laplace model produces a more remarkable leptokurtic pattern of the risk-neutral distribution implied by options, as well as generating more pronounced volatility smirks than the normal model.

Keywords general equilibrium      recursive utility      option pricing      Laplace distribution      volatility smirk     
Issue Date: 23 September 2016
 Cite this article:   
Jian Chen,Chenghu Ma. Option Pricing Based on Alternative Jump Size Distributions[J]. Front. Econ. China, 2016, 11(3): 439-467.
 URL:  
http://academic.hep.com.cn/fec/EN/10.3868/s060-005-016-0024-0
http://academic.hep.com.cn/fec/EN/Y2016/V11/I3/439
[1] Zhengning Pu, Yasuhisa Hayashiyama. Effects of Carbon Dioxide Control Policy in China by Multi-Regional CGE Model[J]. Front Econ Chin, 2012, 7(4): 580-603.
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