Maxence Penaud

Modelisation of Extreme Events: Shortcomings of the Black-Scholes Model and Introduction to Jump Diffusion Models

This thesis tests how well the Black–Scholes model handles extreme price movements and whether the Merton jump diffusion model does better. Using S&P 500 returns from the 1987 and 2008 crises and corn futures from the 2012 US drought, we find moves of six to thirteen standard deviations, which are virtually impossible...