Option Pricing with Levy Process | Zendy

Eric Benhamou | Zendy

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Option Pricing with Levy Process

Author(s) -

Eric Benhamou

Publication year - 2001

Publication title -

ssrn electronic journal

Language(s) - English

Resource type - Journals

ISSN - 1556-5068

DOI - 10.2139/ssrn.265685

Subject(s) - lévy process , volatility smile , valuation of options , volatility (finance) , implied volatility , economics , econometrics , stochastic volatility , black–scholes model , fourier transform , financial economics , mathematical economics , mathematics , mathematical analysis

In this paper, we assume that log returns can be modelled by a Levy process. We give explicit formulae for option prices by means of the Fourier transform. We explain how to infer the characteristics of the Levy process from option prices. This enables us to generate an implicit volatility surface implied by market data. This model is of particular interest since it extends the seminal Black Scholes [1973] model consistently with volatility smile.

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