This paper extends the jump-diffusion option pricing model of Merton (1976) and the displaced diffusion option pricing model of Rubinstein (1983) to price options on stock indices. First, we provide a theory showing that the stock index value has a positive threshold or positive lower bound if...

This article presents a pure exchange economy that extends Rubinstein (1976) to show how the jump-diffusion option pricing model of Merton (1976) is altered when jumps are correlated with diffusive risks. All correlations are statistically different from zero. In equilibrium, the equity risk...

In this paper we provide a closed form option pricing model with underlying uncertainty modeled as an exponential Lévy process. The stochastic structure of our model relaxes the restrictive assumption of zero covariance between the Brownian motion and Poisson process jump size found in all...