Pricing American Interest Rate Options Under the Jump-Extended Constant-Elasticity-of-Variance Short Rate Models

Estimation of risk-neutral processes in single-factor jump-diffusion interest rate models

“…In our implementation, we assume that the market prices of risk parameters are: θ = −0.167 and ϕ = 0.5, which are coherent with the values in the literature. Next, we combine them with the values of the parameters used by Beliaeva and Nawalkha (2012) to price zero-coupon bonds and bond options. Therefore, we assume that: β = 0.267, m = 0.03, σ = 0.075, λ = 2, η = 0.01.…”

The Role of the Risk-Neutral Jump Size Distribution in Single-Factor Interest Rate Models

“…This model is a slight modification of the one proposed by [13] and used by [15] for pricing American interest rate options. The closed-form solution of this problem is very similar to the one obtained by [13] just replacing by Q .…”

“…Next, we combine them with the values of the parameters used by [15] to price zero-coupon bonds and American interest rate options. Therefore, we assume that = 0.267, = 0.03, = 0.075, = 2, and = 0.01.…”

The Jump Size Distribution of the Commodity Spot Price and Its Effect on Futures and Option Prices

“…This jump size distribution has also been considered by [29] for the volatility and [30] for interest rates. This assumption could be useful for pricing during periods in which positive jumps are expected to dominate negative jumps, for example, coming out of an economic crisis (see [30]) or in certain economic regimes (see [31]).…”

“…This assumption could be useful for pricing during periods in which positive jumps are expected to dominate negative jumps, for example, coming out of an economic crisis (see [30]) or in certain economic regimes (see [31]). With both distributions, the parameters of the jump size distribution and the spot price volatility, , are estimated by means of a system of moment equations of a jump-diffusion process (see [11,32,33]):…”