A0382
Title: Marketability and discrete options with jump risk
Authors: Cheng-Der Fuh - ()
Steven Kou - National University of Singapore (Singapore)
Sheng-Feng Luo - Chung Yuan Christian University (Taiwan) [presenting]
Hsinchieh Wong - National Central University, Taiwan (Taiwan)
Abstract: A simple model based on lookback options by Longstaff has been widely used to study the value of marketability of a security, and has good empirical supports. However, a puzzle is why the model works so well, even if it ignores many practical features, such as discrete monitoring of the lookback options and jump risk. We find that although the discrete monitoring feature and the jump risk each has significant impacts on the model, interestingly the two effects tend to cancel each other, leading to the superb performance of the simple model. To reach this conclusion, we provide a general framework of approximating discrete monitoring options with jump risk, by significantly extending the Keener's method from diffusion models to jump diffusion models.
