Option Pricing Under a Double Exponential Jump Diffusion Model

S. G. Kou, Hui Wang
2004 Management science  
A nalytical tractability is one of the challenges faced by many alternative models that try to generalize the Black-Scholes option pricing model to incorporate more empirical features. The aim of this paper is to extend the analytical tractability of the Black-Scholes model to alternative models with jumps. We demonstrate that a double exponential jump diffusion model can lead to an analytic approximation for finite-horizon American options (by extending the Barone-Adesi and Whaley method) and
more » ... nalytical solutions for popular path-dependent options (such as lookback, barrier, and perpetual American options). Numerical examples indicate that the formulae are easy to implement, and are accurate.
doi:10.1287/mnsc.1030.0163 fatcat:g5d6yawvxbh3zp6csramz2mvpm