2021/06/16 by Yuan Hu, Abootaleb Shirvani, Hu, Yuan +7 · 1 citation
Decision Sciences · Economics, Econometrics and Finance · #Complex Systems and Time Series Analysis #FOS: Economics and business #Mathematical Finance (q-fin.MF) #Stochastic processes and financial applications #Stock Market Forecasting Methods
paper · pdf · doi:10.48550/arxiv.2106.09128
openalex publication_date 2021/06/16 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
Applying the Cherny-Shiryaev-Yor invariance principle, we introduce a generalized Jarrow-Rudd (GJR) option pricing model with uncertainty driven by a skew random walk. The GJR pricing tree exhibits skewness and kurtosis in both the natural and risk-neutral world. We construct implied surfaces for the parameters determining the GJR tree. Motivated by Merton's pricing tree incorporating transaction costs, we extend the GJR pricing model to include a hedging cost. We demonstrate ways to fit the GJR pricing model to a market driver that influences the price dynamics of the underlying asset. We supplement our findings with numerical examples.