Sabri Oncu wrote:
Does anyone know the Ito's formula for jump-diffusions?
All the books and papers I have been able to find so far are very
confusing, since most of the the authors of these books and papers
seem to be quite confused themselves.
I would appreciate any leads.
because of the finite size of the jumps you don't get a simple PDE, you
get a (non-local) integro-differential equation instead, check out:
http://www.iac.cnr.it/~natalini/castiglione05.pdf (16th slide)
http://www.datasimfinancial.com/UserFiles/articles/PIDE.pdf (eqn 3.)
seems like the reference you want is:
Merton, R. 1976 Option Pricing when Underlying Stock Returns are
Discontinuous,
Journal of Financial Economics, 125-144, May 1976
Les
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