Trading Volume in Models of Financial Derivatives
AbstractThis paper develops a subordinated stochastic process model for the asset price, where the directing process is identified as information. Motivated by recent empirical and theoretical work, we make use of the under-used market statistic of transaction count as a suitable proxy for the information flow. An option pricing formula is derived, and comparisons with stochastic volatility models are drawn. Both the asset price and the number of trades are used in parameter estimation. The underlying process is found to be fast mean reverting, and this is exploited to perform an asymptotic expansion. The implied volatility skew is then used to calibrate this model.
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Bibliographic InfoPaper provided by Oxford Financial Research Centre in its series OFRC Working Papers Series with number 2000mf03.
Date of creation: 2000
Date of revision:
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