This paper analyzes the properties of and the differences between derivative pricingmodels that include stochastic volatility or stochastic jumps or both of these riskfactors. The focus is on the pricing of European options. In a first step, we discussthe impact of the parameters in stochastic volatility models and in jump-diffusionmodels, the characteristics of the implied volatility smile in these two models, andthe main structural differences between stochastic volatility and stochastic jumps.In a second step, we consider models that combine the basic risk factors. We showwhich additional characteristics of option prices can be explained by models withboth stochastic volatility and stochastic jumps. We also show that the use of twostochastic volatility processes allows to model a stochastic skew, which cannot becaptured by the other models.
G12 - Asset Pricing ; G13 - Contingent Pricing; Futures Pricing ; Financial theory ; Market research ; Study of commerce ; Individual Working Papers, Preprints ; No country specification