Questions tagged [jump-diffusion]
The jump-diffusion tag has no usage guidance.
32
questions
4
votes
0answers
44 views
Relating two equations in a jump-diffusion process
I am trying to understand an argument involving the pricing kernel $\xi_t$ in the context of a simple jump diffusion model for the price of an asset $S_t$:
\begin{align}
\xi_t = \exp \left[ -\theta ...
1
vote
0answers
45 views
Greeks for Pricing Convertible Bond Using Jump Diffusion Model
I'm learning the jump diffusion model used to price a convertible bond, and got the following stochastic differential equation under risk neutral measure:
$$dS = (r+\lambda*p)Sdt + \sigma*SdW+Sdq$$
$...
1
vote
1answer
71 views
Vanilla Call Option Priced Using Jump Diffusion Model
I'm reading a book called Quant Job Interview Questions and Answers and came across the following question and its answer, but cannot make sense of it, so I really appreciate your advice:
Question 2....
4
votes
4answers
179 views
What is the intuition behind “jumps” causing volatility skew?
Some models use jumps as a way to explain volatility skew. I understand that if jumps exist, then you are "mishedged" as you no longer can continuously hedge. Options have a gamma component and ...
2
votes
0answers
36 views
B-S derivative with another boundary condition
I want to use the derivation of BS for another type of derivative, not an option. Known the derivation of the Black-Scholes differential equation, is it possible to use in the same equation when my ...
1
vote
0answers
22 views
Pricing barrier option under Levy process: Biased estimate?
I want to price a down and out call, barrier option, with the underlying asset following a Levy process. I am interest on the Kou double exponential model or the NIG process, to capture asymmetric ...
1
vote
0answers
45 views
Why can't we create a “magic” basket of options to sell for no-arbitrage pricing in SVJ model?
I am learning how to price SVJ options and am reading some stuff on no-arbitrage pricing for SVJ model using the typical approach you would use (like in BSM option pricing) of creating a risk free ...
1
vote
1answer
128 views
Predicting time series using Jump Diffusion model and Neural Networks
I am trying to understand the difference between using Jump diffusion model and Neural Networks or more precisely LSTM to predict time series data regardless what that data contains for example a ...
2
votes
0answers
88 views
Jump Diffusion Model - Volatility and Mean of Jumps
I am trying to understand the concept of jump diffusion model. So far what I've understood is that by adding a Jump parameter to a GBM (Geometric Brownian Motion) we can generate a Jump diffusion ...
2
votes
0answers
79 views
Poisson parameter in Merton's Jump-Diffusion Model to price call option
I've been taught the following European call valuation formula under jump-diffusion model:
\begin{equation}
price = E[e^{-rT}max(S_T-K,0)] =\sum_{j = 0}^\infty e^{-rT}P_j(\lambda)E[max(S_T-K,0)|J=j]
\...
3
votes
4answers
251 views
Basic book on stochastic calculus, Itô and jump processes and Brownian Motion
I was looking for a good book that explains at beginner-level the basic of stochastic calculus, probability and random variables, Itô and jump processes as well as Brownian Motion.
At university we ...
6
votes
0answers
61 views
Formal proof market incompleteness under jump diffusion
Does anyone have formal proof of markets incompleteness under jump diffusion ?
I am familiar with the intuitive approach as mentioned in Tankov (delta), yet I am looking for a formal approach and ...
5
votes
0answers
673 views
Understanding and simulating the jumps in Merton's Jump-Diffusion SDE?
I found this great post deriving the solution to the Merton Jump-Diffusion SDE
$$S_t = S_0\exp\left(\left(\mu - \frac{\sigma^2}{2}\right)t + \sigma W_t\right)\prod_{j=0}^{N_t}V_j$$
The first part of ...
2
votes
0answers
181 views
Simulating compound Poisson jump-diffusion process with time-changed jump frequency
I want to simulate a jump-diffusion process with compound Poisson jumps and a deterministic jump frequency function $\lambda(t)$.
The function should follow the following stochastic differential ...
1
vote
1answer
64 views
Levy process and random measure
I am wondering if random measures are used under a Levy process and how this connects to finance (particularly pricing). Any paper or books for suggestions is welcomed.
2
votes
0answers
66 views
Hedging jump models with a infinite number of derivatives
First of all, I inform you that I am not a financial mathematician and have vague knowledge about an incomplete market.
Stochastic volatility models are incomplete so derivatives cannot be ...
4
votes
1answer
232 views
Bond PDE under an Affine Jump Diffusion model
Under the Jump extended Vasicek model, the dynamics of the short rate are as follow :
$$dr_t=\kappa(\theta-r_t)dt+\sigma\sqrt{r_t}\,dW_t+d\left(\sum\limits_{i=1}^{N_t}\,J_i\right)$$
where $N_t$ ...
3
votes
0answers
65 views
Euler discretization with jumps
There is a process
$B_t = B_0\prod_{i=1}^{N_t}(1-Z_n)$,
where $Z_n=e^{-ξ_n}$ for i.i.d exponentially distributed random variables $(ξn)_{n≥1}$ with rate $ρ=20$.
${N_t}$ is a counting process ...
2
votes
1answer
323 views
Crash cliquet price
Denote by $n$ the n-th trading day in a year and by $S_n$ the stock price on that day. An instrument expirying in 1 year pays $\max(0,1-\frac{S_n}{S_{n-1}})$ and early terminates if $\frac{S_n}{S_{n-1}...
2
votes
1answer
167 views
Barrier Option under Jump Diffusion
I am trying to price a Barrier Option under a model with jumps. I am using a brownian bridge approach but struggle with the jumps around these bridges and don't know how to handle this.
My main ...
1
vote
1answer
111 views
stochastic vol modelling not enough for smile
It seems in practice models that include Stochastic Volatility alone do not have enough power to produce actual observed implied vol surfaces. Is there recent empirical literature documenting this?
5
votes
1answer
174 views
Simulate double exponential process with correlated jumps?
So, I'm trying to simulate a correlated double exponential jump process for two assets, and I understand the pure exponential jump process ($\eta_1$ and $\eta_2$, the probability of an upward jump ...
1
vote
1answer
650 views
How to estimate lambda for Jump-Diffusion Process from Empirical data?
So, I have really no idea how to go about this, but how would I go about choosing sensible parameter values for a basic jump-diffusion simulation, namely $\lambda$ ?
For example, getting the average ...
1
vote
1answer
395 views
exercise on multivariate Ito's lemma + jumps (Poisson)
Given the two jump-diffusions:
\begin{equation}
\begin{aligned}
dX_{1,t} &= a_1 dt + b_1 dW_t + c_1 dN_t(\lambda) \\
dX_{2,t} &= a_2 dt + b_2 dW'_t + c_2 dN_t(\lambda) \\
corr(dW,dW') &= \...
4
votes
1answer
569 views
Merton's jump diffusion
Can someone help me finding the expected value of the solution to Merton's jump diffusion model:
\begin{align}
S_t &= S_0 \exp \left( \left(r - \frac{\sigma^2}{2} - \lambda k \right) t + \sigma ...
2
votes
1answer
132 views
Cadlag Property of Jump Proccesses
I've recently started studying Cont & Tankov's "financial modelling with jump processes". I'm curious as to why that this assumption of the cadlag property (also called RCLL "right continuous ...
0
votes
1answer
346 views
Trouble understanding jump part in Kou double exponential jump diffusion model
I am trying to work with Kou's double exponential Jump-diffusion model and simulate a price path in a programming language.
So the dynamics of the asset price in Kou's model follow:
\begin{equation}
...
7
votes
1answer
823 views
Black-Scholes formula for Poisson jumps
For underlying asset
$$d S = r S dt + \sigma S d W + (J-1)Sd N$$
here $W$ is a Brownian motion, $N(t)$ is Poisson process with intensity $\lambda.$
Suppose $J$ is log-normal with standard deviation $\...
0
votes
1answer
56 views
influence of exponential-Lévy on a call price
Thank you all for answering my question.
I wanted to know what influence has the exponential-Lévy model on a call price (how the curve changes).
If we add Merton jumps, we get an EDPID like this one: ...
1
vote
0answers
77 views
How are Levy driven SDE simulated?
Do you just use an Euler scheme as before?
E.g. take this process, OU process with a Levy driver.
\begin{equation}
\text{d}V_t = -\lambda V_t\text{d}t + dZ_t
\end{equation}
Do you just have
$V_{...
4
votes
1answer
407 views
Pricing the discount zero-coupon bond under a jump-diffusion model
I am going to get the price of a zero coupon bond in a jump-diffusion model. The dynamic of interest rate as follow
$$dr_t=\kappa(\theta-r_t)dt+\sigma\sqrt{r_t}\,dW_t+d\left(\sum\limits_{i=1}^{N_t}\,...
4
votes
1answer
598 views
Risk neutral measure for jump processes
Assume we model the dynamics of a tradable asset as follows
$$ S_t = S_0 \exp\left[\sigma W_t +(\alpha-\beta\lambda-\frac{1}{2}\sigma^2)t+J_t \right] $$
where $W_t$ is a standard Brownian motion ...
