APPROXIMATING GARCH-JUMP MODELS, JUMP-DIFFUSION PROCESSES, AND OPTION PRICING |
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Authors: | Jin-Chuan Duan Peter Ritchken Zhiqiang Sun |
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Institution: | Rotman School of Management, University of Toronto; Weatherhead School of Management, Case Western Reserve University; National City Bank |
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Abstract: | This paper considers the pricing of options when there are jumps in the pricing kernel and correlated jumps in asset prices and volatilities. We extend theory developed by Nelson (1990) and Duan (1997) by considering the limiting models for our approximating GARCH Jump process. Limiting cases of our processes consist of models where both asset price and local volatility follow jump diffusion processes with correlated jump sizes. Convergence of a few GARCH models to their continuous time limits is evaluated and the benefits of the models explored. |
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Keywords: | GARCH option models stochastic volatility models with jumps limiting GARCH with Jump processes |
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