A jump telegraph model for option pricing

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A jump telegraph model for option pricing

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Nikita Ratanov

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Nikita Ratanov

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.

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Article provided by Taylor and Francis Journals in its journal Quantitative Finance.

Volume (Year): 7 (2007)
Issue (Month): 5 ()
Pages: 575-583
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Handle: RePEc:taf:quantf:v:7:y:2007:i:5:p:575-583

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Paper
- Nikita Ratanov, 2004. "A Jump Telegraph Model for Option Pricing," BORRADORES DE INVESTIGACIÃN 001919, UNIVERSIDAD DEL ROSARIO - FACULTAD DE ECONOMÍA. [Downloadable!]

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166. [Downloadable!] (restricted)
Nikita Ratanov, 2004. "Option Pricing Model Based on Telegraph Processes with Jumps," BORRADORES DE INVESTIGACIÃN 004330, UNIVERSIDAD DEL ROSARIO - FACULTAD DE ECONOMÍA. [Downloadable!]

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Nikita Ratanov, 2005. "Quantil Hedging for telegraph markets and its applications to a pricing of equity-linked life insurance contracts," BORRADORES DE INVESTIGACIÃN 003410, UNIVERSIDAD DEL ROSARIO - FACULTAD DE ECONOMÍA. [Downloadable!]
Alessandro Gregorio & Stefano Iacus, 2008. "Parametric estimation for the standard and geometric telegraph process observed at discrete times," Statistical Inference for Stochastic Processes, Springer, vol. 11(3), pages 249-263, October. [Downloadable!] (restricted)

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