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Option Pricing When Jump Risk Is Systematic 1
Author(s) -
Ahn Chang Mo
Publication year - 1992
Publication title -
mathematical finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.98
H-Index - 81
eISSN - 1467-9965
pISSN - 0960-1627
DOI - 10.1111/j.1467-9965.1992.tb00034.x
Subject(s) - jump , jump diffusion , economics , valuation of options , portfolio , capital asset pricing model , rational pricing , market portfolio , financial economics , econometrics , systematic risk , physics , quantum mechanics
This paper generalizes the Merton jump‐diffusion option pricing model to the case in which jump risk cannot be eliminated in the market portfolio. the option pricing formula is obtained using a general equilibrium asset pricing model. Since jump risk is systematic, the correlation of the underlying stock's jump with the market portfolio's jump affects the option price.