Research on pricing of carbon options based on an improved jump test method

Xiaohu Liang; Yijing Pan

doi:10.1016/j.frl.2025.109406

Research on pricing of carbon options based on an improved jump test method

Xiaohu Liang^*
, Yijing Pan

^*Corresponding author for this work

Research output: Journal Publications and Reviews › RGC 21 - Publication in refereed journal › peer-review

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Abstract

In this paper, we focus on the problem of pricing carbon options. The underlying asset of carbon options is described by a jump diffusion process. We first improve the jump test method proposed by Lee and Mykland (2008) for identifying abnormal jumps in asset price series and estimating model parameters. Building on this framework, our approach enables pricing analysts to adjust data structures with greater flexibility based on quantitative evidence, thereby enhancing the flexibility of carbon options pricing. Finally, we employ Monte Carlo simulations and empirical data to validate and discuss this method. © 2025 The Authors.

Original language	English
Article number	109406
Number of pages	11
Journal	Finance Research Letters
Volume	90
Online published	19 Dec 2025
DOIs	https://doi.org/10.1016/j.frl.2025.109406
Publication status	Published - Feb 2026
Externally published	Yes

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 13 Climate Action

Research Keywords

Carbon emission trading
Carbon option
European option pricing
Jump diffusion model
Lee-Mykland jump test method

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This full text is made available under CC-BY 4.0. https://creativecommons.org/licenses/by/4.0/

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abstract = "In this paper, we focus on the problem of pricing carbon options. The underlying asset of carbon options is described by a jump diffusion process. We first improve the jump test method proposed by Lee and Mykland (2008) for identifying abnormal jumps in asset price series and estimating model parameters. Building on this framework, our approach enables pricing analysts to adjust data structures with greater flexibility based on quantitative evidence, thereby enhancing the flexibility of carbon options pricing. Finally, we employ Monte Carlo simulations and empirical data to validate and discuss this method. {\textcopyright} 2025 The Authors.",

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language = "English",

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T1 - Research on pricing of carbon options based on an improved jump test method

AU - Liang, Xiaohu

AU - Pan, Yijing

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Y1 - 2026/2

N2 - In this paper, we focus on the problem of pricing carbon options. The underlying asset of carbon options is described by a jump diffusion process. We first improve the jump test method proposed by Lee and Mykland (2008) for identifying abnormal jumps in asset price series and estimating model parameters. Building on this framework, our approach enables pricing analysts to adjust data structures with greater flexibility based on quantitative evidence, thereby enhancing the flexibility of carbon options pricing. Finally, we employ Monte Carlo simulations and empirical data to validate and discuss this method. © 2025 The Authors.

AB - In this paper, we focus on the problem of pricing carbon options. The underlying asset of carbon options is described by a jump diffusion process. We first improve the jump test method proposed by Lee and Mykland (2008) for identifying abnormal jumps in asset price series and estimating model parameters. Building on this framework, our approach enables pricing analysts to adjust data structures with greater flexibility based on quantitative evidence, thereby enhancing the flexibility of carbon options pricing. Finally, we employ Monte Carlo simulations and empirical data to validate and discuss this method. © 2025 The Authors.

KW - Carbon emission trading

KW - Carbon option

KW - European option pricing

KW - Jump diffusion model

KW - Lee-Mykland jump test method

UR - https://www.scopus.com/pages/publications/105025575300

UR - https://www.scopus.com/record/pubmetrics.uri?eid=2-s2.0-105025575300&origin=recordpage

U2 - 10.1016/j.frl.2025.109406

DO - 10.1016/j.frl.2025.109406

M3 - RGC 21 - Publication in refereed journal

SN - 1544-6123

VL - 90

JO - Finance Research Letters

JF - Finance Research Letters

M1 - 109406

ER -

Research on pricing of carbon options based on an improved jump test method

Abstract

UN SDGs

Research Keywords

Publisher's Copyright Statement

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