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Contribution Details

Type Working Paper
Scope Discipline-based scholarship
Title Analytical option pricing under an asymmetrically displaced double gamma jump-diffusion model
Organization Unit
  • Matthias Thul
  • Ally Quan Zhang
  • English
Institution University of Zurich
Series Name SSRN
Number 2311673
ISSN 1556-5068
Number of Pages 46
Date 2014
Abstract Text We generalize the Kou (2002) double exponential jump-diusion 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 exibility 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.
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Digital Object Identifier 10.2139/ssrn.2311673
Other Identification Number merlin-id:8902
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Additional Information 26th Australasian Finance and Banking Conference 2013