Option pricing driven by a telegraph process with random jumps

Oscar López, Nikita Ratanov

Research output: Contribution to journalResearch Articlepeer-review

21 Scopus citations


In this paper we propose a class of financial market models which are based on telegraph processes with alternating tendencies and jumps. It is assumed that the jumps have random sizes and that they occur when the tendencies are switching. These models are typically incomplete, but the set of equivalent martingale measures can be described in detail. We provide additional suggestions which permit arbitrage-free option prices as well as hedging strategies to be obtained.

Original languageEnglish (US)
Pages (from-to)838-849
Number of pages12
JournalJournal of Applied Probability
Issue number3
StatePublished - Sep 2012

All Science Journal Classification (ASJC) codes

  • Statistics and Probability
  • General Mathematics
  • Statistics, Probability and Uncertainty


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