Catastrophe equity put options under stochastic volatility and catastrophe-dependent jumps

Hwa Sung Kim, Bara Kim, Jerim Kim

Research output: Contribution to journalArticlepeer-review

9 Scopus citations


This paper develops a catastrophe equity put (CatEPut) option model under realistic assumptions. To reflect the phenomena of real data, we adopt the following assumptions. First, following the reasoning in Lin and Wang [12], we assume that the loss index follows a compound Poisson process with jumps of a mixture of Erlangs. Second, the volatility of stock return is assumed to be stochastic as in Heston [8]. Under the assumptions, we derives a pricing formula for CatEPut options. Numerical examples are given to insist that the pricing formula can be easily implemented numerically. We also confirm the validity and accuracy of implementation of the pricing formula by comparing the numerical results obtained by the pricing formula with those obtained by the Monte Carlo simulation.

Original languageEnglish
Pages (from-to)41-55
Number of pages15
JournalJournal of Industrial and Management Optimization
Issue number1
StatePublished - Jan 2014


  • CatEPut
  • Jump-diffusion process
  • Moment generating transform
  • Option pricing
  • Stochastic volatility


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