Campus Units

Economics

Document Type

Article

Publication Version

Published Version

Publication Date

2012

Journal or Book Title

Theoretical Economics Letters

Volume

2

Issue

4

First Page or Article ID Number

400

Last Page

407

DOI

10.4236/tel.2012.24074

Abstract

The model of Bates specifies a rich, flexible structure of stock dynamics suitable for applications in finance and eco- nomics, including valuation of derivative securities. This paper analytically derives a closed-form expression for the joint conditional characteristic function of a stock’s log-price and squared volatility under the model dynamics. The use of the function, based on inverting it, is illustrated on examples of pricing European-, Bermudan-, and American-style options. The discussed approach for European-style derivatives improves on the option formula of Bates. The suggested approach for American-style derivatives, based on a compound-option technique, offers an alternative solution to exist- ing finite-difference methods

Comments

This is an article from Theoretical Economics Letters 2 (2012): 400, doi:10.4236/tel.2012.24074. Posted with permission.

Rights

This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Copyright Owner

Scientific Research Publishing Inc.

Language

en

File Format

application/pdf

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