# American Institute of Mathematical Sciences

January  2021, 17(1): 133-149. doi: 10.3934/jimo.2019103

## Pricing power exchange options with hawkes jump diffusion processes

 Department of Mathematics, Indian Institute of Technology Delhi, Hauz Khas, Delhi, 110016, India

* Corresponding author: Anubha Goel

Received  June 2018 Revised  March 2019 Published  September 2019

In this article, we propose a jump diffusion framework to price the power exchange options. We model the price dynamics of assets using a Hawkes jump diffusion model with common factors to describe the correlated jump risk and clustering of asset price jumps. In the proposed model, the jumps, reflecting common systematic risk and idiosyncratic risk, are modeled by self-exciting Hawkes process with exponential decay. A pricing formula for valuation of power exchange option is obtained following the measure-change technique. Existing models in the literature are shown to be special cases of the proposed model. Finally, sensitivity analysis is given to illustrate the effect of jump risk and jump clustering on option prices. We observe that jump clustering significantly effects the option prices.

Citation: Puneet Pasricha, Anubha Goel. Pricing power exchange options with hawkes jump diffusion processes. Journal of Industrial & Management Optimization, 2021, 17 (1) : 133-149. doi: 10.3934/jimo.2019103
##### References:

show all references

##### References:
Option prices against time to maturity
Option prices against correlation coefficient when T = 1.5
Option prices against the parameters of common Hawkes process
Option prices against the parameters of Hawkes process for Asset 1
Option prices against the parameters of Hawkes process for Asset 2
Comparison of option prices against the parameters of common Hawkes process and asset specific Hawkes processes
Comparison of option prices against the parameters of amplitudes of jump sizes
Values of the Parameters in the Base Case
 Parameters Values Parameters Values $S_1(0)$ 10 $S_2(0)$ 10 $\sigma_1$ 0.2 $\sigma_2$ 0.2 $a_1$ 0 $a_2$ 0 $b_1$ 0.01 $b_2$ 0.01 $\lambda_{1, 0}$ 1 $\lambda_{2, 0}$ 1 $\theta_{1}$ 1 $\theta_2$ 1 $\delta_1$ 2 $\delta_2$ 2 $\lambda_{0}$ 1 $\alpha_1$ 1 $\theta$ 1 $\alpha_2$ 1 $\delta$ 2 $\eta_1$ 1 $r$ 0.02 $\eta_2$ 1
 Parameters Values Parameters Values $S_1(0)$ 10 $S_2(0)$ 10 $\sigma_1$ 0.2 $\sigma_2$ 0.2 $a_1$ 0 $a_2$ 0 $b_1$ 0.01 $b_2$ 0.01 $\lambda_{1, 0}$ 1 $\lambda_{2, 0}$ 1 $\theta_{1}$ 1 $\theta_2$ 1 $\delta_1$ 2 $\delta_2$ 2 $\lambda_{0}$ 1 $\alpha_1$ 1 $\theta$ 1 $\alpha_2$ 1 $\delta$ 2 $\eta_1$ 1 $r$ 0.02 $\eta_2$ 1
 [1] Hui Lv, Xing'an Wang. Dissipative control for uncertain singular markovian jump systems via hybrid impulsive control. Numerical Algebra, Control & Optimization, 2021, 11 (1) : 127-142. doi: 10.3934/naco.2020020 [2] Yuanshi Wang. Asymmetric diffusion in a two-patch mutualism system characterizing exchange of resource for resource. Discrete & Continuous Dynamical Systems - B, 2021, 26 (2) : 963-985. doi: 10.3934/dcdsb.2020149 [3] Emre Esentürk, Juan Velazquez. Large time behavior of exchange-driven growth. Discrete & Continuous Dynamical Systems - A, 2021, 41 (2) : 747-775. doi: 10.3934/dcds.2020299 [4] Neil S. Trudinger, Xu-Jia Wang. Quasilinear elliptic equations with signed measure. Discrete & Continuous Dynamical Systems - A, 2009, 23 (1&2) : 477-494. doi: 10.3934/dcds.2009.23.477 [5] Guangjun Shen, Xueying Wu, Xiuwei Yin. Stabilization of stochastic differential equations driven by G-Lévy process with discrete-time feedback control. Discrete & Continuous Dynamical Systems - B, 2021, 26 (2) : 755-774. doi: 10.3934/dcdsb.2020133 [6] Gang Luo, Qingzhi Yang. The point-wise convergence of shifted symmetric higher order power method. Journal of Industrial & Management Optimization, 2021, 17 (1) : 357-368. doi: 10.3934/jimo.2019115 [7] Kai Zhang, Xiaoqi Yang, Song Wang. Solution method for discrete double obstacle problems based on a power penalty approach. Journal of Industrial & Management Optimization, 2020  doi: 10.3934/jimo.2021018 [8] Ugo Bessi. Another point of view on Kusuoka's measure. Discrete & Continuous Dynamical Systems - A, 2020  doi: 10.3934/dcds.2020404 [9] Fabio Camilli, Giulia Cavagnari, Raul De Maio, Benedetto Piccoli. Superposition principle and schemes for measure differential equations. Kinetic & Related Models, 2021, 14 (1) : 89-113. doi: 10.3934/krm.2020050 [10] Harrison Bray. Ergodicity of Bowen–Margulis measure for the Benoist 3-manifolds. Journal of Modern Dynamics, 2020, 16: 305-329. doi: 10.3934/jmd.2020011 [11] Mark F. Demers. Uniqueness and exponential mixing for the measure of maximal entropy for piecewise hyperbolic maps. Discrete & Continuous Dynamical Systems - A, 2021, 41 (1) : 217-256. doi: 10.3934/dcds.2020217 [12] Giulia Luise, Giuseppe Savaré. Contraction and regularizing properties of heat flows in metric measure spaces. Discrete & Continuous Dynamical Systems - S, 2021, 14 (1) : 273-297. doi: 10.3934/dcdss.2020327 [13] Noriyoshi Fukaya. Uniqueness and nondegeneracy of ground states for nonlinear Schrödinger equations with attractive inverse-power potential. Communications on Pure & Applied Analysis, 2021, 20 (1) : 121-143. doi: 10.3934/cpaa.2020260 [14] Feimin Zhong, Jinxing Xie, Yuwei Shen. Bargaining in a multi-echelon supply chain with power structure: KS solution vs. Nash solution. Journal of Industrial & Management Optimization, 2020  doi: 10.3934/jimo.2020172 [15] Russell Ricks. The unique measure of maximal entropy for a compact rank one locally CAT(0) space. Discrete & Continuous Dynamical Systems - A, 2021, 41 (2) : 507-523. doi: 10.3934/dcds.2020266 [16] Michiel Bertsch, Flavia Smarrazzo, Andrea Terracina, Alberto Tesei. Signed Radon measure-valued solutions of flux saturated scalar conservation laws. Discrete & Continuous Dynamical Systems - A, 2020, 40 (6) : 3143-3169. doi: 10.3934/dcds.2020041 [17] Sugata Gangopadhyay, Constanza Riera, Pantelimon Stănică. Gowers $U_2$ norm as a measure of nonlinearity for Boolean functions and their generalizations. Advances in Mathematics of Communications, 2021, 15 (2) : 241-256. doi: 10.3934/amc.2020056 [18] Kimie Nakashima. Indefinite nonlinear diffusion problem in population genetics. Discrete & Continuous Dynamical Systems - A, 2020, 40 (6) : 3837-3855. doi: 10.3934/dcds.2020169 [19] Zaihui Gan, Fanghua Lin, Jiajun Tong. On the viscous Camassa-Holm equations with fractional diffusion. Discrete & Continuous Dynamical Systems - A, 2020, 40 (6) : 3427-3450. doi: 10.3934/dcds.2020029 [20] Hai-Liang Li, Tong Yang, Mingying Zhong. Diffusion limit of the Vlasov-Poisson-Boltzmann system. Kinetic & Related Models, , () : -. doi: 10.3934/krm.2021003

2019 Impact Factor: 1.366