PROPERTIES OF OPTION PRICES IN A JUMP DIFFUSION MODEL

Abstract. We study convexity and monotonicity properties of option prices in a jump-diffusion model using the fact that these prices satisfy certain parabolic integro-differential equations. Conditions are provided under which preservation of convexity holds, i.e. under which the value, calculated under a chosen martingale measure, of an option with a con-vex contract function is convex as a function of the underlying stock price. The preservation of convexity is then used to derive monotonicity properties of the option value with respect to the different parameters of the model, such as the volatility, the jump size and the jump intensity. 1