Catastrophe equity put options under stochastic volatility and catastrophe-dependent jumps

Hwa Sung Kim, Bara Kim, Jerim Kim

Research output: Contribution to journalArticle

5 Citations (Scopus)

Abstract

This paper develops a catastrophe equity put (CatEPut) option model under realistic assumptions. To reflect the phenomena of real data, we adopt the following assumptions. First, following the reasoning in Lin and Wang [12], we assume that the loss index follows a compound Poisson process with jumps of a mixture of Erlangs. Second, the volatility of stock return is assumed to be stochastic as in Heston [8]. Under the assumptions, we derives a pricing formula for CatEPut options. Numerical examples are given to insist that the pricing formula can be easily implemented numerically. We also confirm the validity and accuracy of implementation of the pricing formula by comparing the numerical results obtained by the pricing formula with those obtained by the Monte Carlo simulation.

Original languageEnglish
Pages (from-to)41-55
Number of pages15
JournalJournal of Industrial and Management Optimization
Volume10
Issue number1
DOIs
Publication statusPublished - 2014 Jan 1

Fingerprint

Stochastic Volatility
Catastrophe
Equity
Pricing
Jump
Dependent
Costs
Compound Poisson Process
Stock Returns
Volatility
Monte Carlo Simulation
Reasoning
Numerical Examples
Numerical Results
Stochastic volatility
Put option

Keywords

  • CatEPut
  • Jump-diffusion process
  • Moment generating transform
  • Option pricing
  • Stochastic volatility

ASJC Scopus subject areas

  • Business and International Management
  • Strategy and Management
  • Control and Optimization
  • Applied Mathematics

Cite this

Catastrophe equity put options under stochastic volatility and catastrophe-dependent jumps. / Kim, Hwa Sung; Kim, Bara; Kim, Jerim.

In: Journal of Industrial and Management Optimization, Vol. 10, No. 1, 01.01.2014, p. 41-55.

Research output: Contribution to journalArticle

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