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Preferences, Lévy Jumps and Option Pricing
Chenghu Ma
Annals of Financial Economics p1-39, Volume 3, 2007
#002088 20131014 (published) Views:2
This paper derives an equilibrium formula for pricing European options and other contingent claims which allows incorporating impacts of several important economic variable on security prices including, among others, representative agent preferences, future volatility and rare jump events. The derived formulae is general and flexible enough to include some important option pricing formulae in the literature, such as Black-Scholes, Naik-Lee, Cox-Ross and Merton option pricing formulae. The existence of jump risk as a potential explanation of the moneyness biases associated with the Black-Scholes model is explored.
JEL-Codes: G10, G11, G12, G13
Keywords: equilibrium option pricing, recursive utility, Levy jumps.


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