This thesis considers the pricing of options when there are jumps in the pricing kernel and correlated jumps in asset returns. Our model nests the GARCH option model of Heston and Nandi (2000) and the model of Ahn (1992), where the jump risk is priced. It contains Bates’s (1996) stochastic volatility and jump model as a continuous-time limit. We also provide a closed-form solution for our model. This is the first closed-form solution for GARCH-Jump models in the literature.
