α-quantile option in a jump-diffusion economy

Ballotta, L. (2002). α-quantile option in a jump-diffusion economy. Financial Engineering, E-commerce and Supply Chain, 70, pp. 75-87. doi: 10.1007/978-1-4757-5226-7_5

[img]
Preview
PDF - Accepted Version
Download (894kB) | Preview

Abstract

In this note, we extend the analysis of the behaviour of the α-quantile option to the case of a contract’s underlying security driven by a Lévy process. To this aim, a simulation procedure based on the order statistics is implemented. The results produced are also used to study the connections between the occurring of a jump in the market and option prices. In particular, we show that, no matter the risk-neutral valuation framework chosen, the occurring of a jump affects the tails of the distribution of the functional which defines the option payoff. Since options pay a premium for the probability mass existing in the tails of such a distribution, this fact might be seen as a first key to interpret the observed biases.

Item Type: Article
Additional Information: The final publication is available at Springer via http://dx.doi.org/10.1007/978-1-4757-5226-7_5
Uncontrolled Keywords: Lookback option; α-quantile option; Lévy processes; Lévy-Khintchine formula; incomplete markets; order stastistic.
Subjects: H Social Sciences > HG Finance
Divisions: Cass Business School > Faculty of Actuarial Science & Insurance > Faculty of Actuarial Science & Insurance Actuarial Research Reports
URI: http://openaccess.city.ac.uk/id/eprint/2270

Actions (login required)

View Item View Item

Downloads

Downloads per month over past year

View more statistics