A jump telegraph model for option pricing

Nikita Ratanov

Research output: Contribution to journalArticlepeer-review

37 Scopus citations

Abstract

In this paper we introduce a financial market model based on continuous time random motions with alternating constant velocities and jumps occurring when the velocities are switching. This model is free of arbitrage if jump directions are in a certain correspondence with the velocities of the underlying random motion. Replicating strategies for European options are constructed in detail. Exact formulae for option prices are derived.

Original languageEnglish (US)
Pages (from-to)575-583
Number of pages9
JournalQuantitative Finance
Volume7
Issue number5
DOIs
StatePublished - Oct 2007

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics, Econometrics and Finance(all)

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