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Jump Diffusion Option Valuation in Discrete Time
Author(s) -
AMIN KAUSHIK I.
Publication year - 1993
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1993.tb05130.x
Subject(s) - jump diffusion , jump , valuation (finance) , binomial options pricing model , discrete time and continuous time , jump process , mathematics , limiting , statistical physics , econometrics , computer science , valuation of options , statistics , economics , engineering , physics , finance , mechanical engineering , quantum mechanics
We develop a simple, discrete time model to value options when the underlying process follows a jump diffusion process. Multivariate jumps are superimposed on the binomial model of Cox, Ross, and Rubinstein (1979) to obtain a model with a limiting jump diffusion process. This model incorporates the early exercise feature of American options as well as arbitrary jump distributions. It yields an efficient computational procedure that can be implemented in practice. As an application of the model, we illustrate some characteristics of the early exercise boundary of American options with certain types of jump distributions.