Pricing contingent claims using the Heath-Jarrow-morton term structure model and time-changed lévy processes

This study examines the contingent claim valuation of risky assets in a stochastic interest rate economy using the time-changed Lévy processes model developed by Carr and Wu (2004). The proposed model adopts the approach of Heath, Jarrow and Morton's (1992) to obtain an analytical solution of European options on risky assets and futures contracts. Furthermore, this investigation develops upper bounds for American options prices using the proposed model. The upper bounds derived in this study are not only very tight and accurate for American option pricing, but can also enhance assessment and hedging efficiency in real world markets. The asset returns obtained by the proposed model are more closely match actual market phenomena presented in the option literature because the leptokurtic and asymmetric features, interest rates and volatility are stochastic over time.