Pricing Vulnerable Options with Jump Clustering

Abstract

This paper presents a valuation of vulnerable European options using a model with self-exciting Hawkes processes that allow for clustered jumps rather than independent jumps. Many existing valuation models can be regarded as special cases of the model proposed here. Using numerical analyses, this study also performs sensitivity analyses and compares the results to those of existing models for European call options. The results show that jump clustering has a significant impact on the option value. © 2017 Wiley Periodicals, Inc. Jrl Fut Mark.