Please use this identifier to cite or link to this item: https://doi.org/10.1080/14697680701881771
Title: Pricing jump risk with utility indifference
Authors: Wu, L.
Dai, M. 
Keywords: Jump-diffusion processes
Numerical method
Option pricing
Utility indifference prices
Issue Date: Mar-2009
Citation: Wu, L., Dai, M. (2009-03). Pricing jump risk with utility indifference. Quantitative Finance 9 (2) : 177-186. ScholarBank@NUS Repository. https://doi.org/10.1080/14697680701881771
Abstract: This paper is concerned with option pricing in an incomplete market driven by a jump-diffusion process. We price options according to the principle of utility indifference. Our main contribution is an efficient multi-nomial tree method for computing the utility indifference prices for both European and American options. Moreover, we conduct an extensive numerical study to examine how the indifference prices vary in response to changes in the major model parameters. It is shown that the model reproduces 'crash-o-phobia' and other features of market prices of options. In addition, we find that the volatility smile generated by the model corresponds to a zero mean jump size, while the volatility skew corresponds to a negative mean jump size.
Source Title: Quantitative Finance
URI: http://scholarbank.nus.edu.sg/handle/10635/103970
ISSN: 14697688
DOI: 10.1080/14697680701881771
Appears in Collections:Staff Publications

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