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| Author: | Kou, S.G. |
| Title: | A jump-diffusion model for option pricing |
| Journal: | Management Science
2002 : AUG, VOL. 48:8, p. 1086-1101 |
| Index terms: | Contingent claims Interest rates Option prices Rational expectations |
| Language: | eng |
| Abstract: | Brownian motion and normal distribution have been widely used in the Black-Scholes option-pricing framework to model the return of assets. However, two puzzels emerge from many empirical investigations: the leptokurtic feature that the return distribution of assets may have a higher peak and two (asymmetric) heavier tails than those of the normal distribution, and an empirical phenomenon called "volatility smile" in option markets. To incorporate both of them and to strike a balance between reality and tractability, this paper proposes, for the use of option pricing, a double exponential jump-diffusion model. |
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