Parisian options with jumps: a maturity–excursion randomization approach. Issue 11 (2nd November 2018)

• Record Type: Journal Article
• Authors: Chesney, Marc; Vasiljević, Nikola
• Is Part Of: Quantitative finance. Volume 18:Issue 11(2018)
• Page Start: 1887
• Page End: 1908
• Publication Date: 2018-11-02
• Subjects: Parisian options -- Maturity–excursion randomization -- Hyper-exponential jump–diffusion model -- Excursion disentanglement; G13 -- C02 -- C63; Finance -- Periodicals; Business mathematics -- Periodicals; Finance -- Mathematical models -- Periodicals; Investments -- Mathematics -- Periodicals; Economics -- Periodicals; Finances -- Modèles mathématiques -- Périodiques; 332.015118
• DOI: 10.1080/14697688.2018.1444785
• Languages: English
• ISSNs: 1469-7688

Abstract

Abstract : This paper introduces an analytically tractable method for the pricing of European and American Parisian options in a flexible jump–diffusion model. Our contribution is threefold. First, using a double Laplace–Carson transform with respect to the option maturity and the Parisian (excursion) time, we obtain closed-form solutions for different types of Parisian contracts. Our approach allows us also to analytically disentangle contributions of the jump and diffusion components for Parisian options in the excursion region. Second, we provide numerical examples and quantify the impact of jumps on the option price and the Greeks. Finally, we study the non-monotonic effects of volatility and jump intensity close to the excursion barrier, which are important for shareholders' investment policy decisions in a levered firm.