rJD*(i+1,ji+1)=rJD*(ji+1)={rD*(ji)+Δu(ji,ji+1)+μ+γ,w.prob.λ2pu(ji),rD*(ji)+Δu(ji,ji+1)w.prob.(1λ)pu(ji),rD*(ji)+Δu(ji,ji+1)+μγ,w.prob.λ2pu(ji),rD*(ji)+Δd(ji,ji+1)+μ+γ,w.prob.λ2pd(ji),rD*(ji)+Δd(ji,ji+1),w.prob.(1λ)pd(ji),rD*(ji)+Δd(ji,ji+1)+μγ,w.prob.λ2pd(ji).

si323_e

Then, the hexanomial tree representing the jump-diffusion process (16) is defined by

rJD*(i+1,ji+1 )=rJD*(ji+1)+α(i+1),

si324_e

for any i = 0,…,M− 1 and jiJi(jd,ju)si325_e.

4 The econometric analysis

4.1 ...

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