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Valuing options in shot noise market

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  • Laskin, Nick

Abstract

A new exactly solvable option pricing model has been introduced and elaborated. It is assumed that a stock price follows a Geometric shot noise process. An arbitrage-free integro-differential option pricing equation has been obtained and solved. The new Greeks have been analytically calculated. It has been shown that in diffusion approximation the developed option pricing model incorporates the well-known Black–Scholes equation and its solution. The stochastic dynamic origin of the Black–Scholes volatility has been uncovered.

Suggested Citation

  • Laskin, Nick, 2018. "Valuing options in shot noise market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 502(C), pages 518-533.
    • Handle: RePEc:eee:phsmap:v:502:y:2018:i:c:p:518-533
    DOI: 10.1016/j.physa.2018.02.113
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    References listed on IDEAS

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    1. Laskin, Nick, 2000. "Fractional market dynamics," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 287(3), pages 482-492.
    2. Austin J. Lemoine & Michael L. Wenocur, 1986. "Technical Note—A Note on Shot-Noise and Reliability Modeling," Operations Research, INFORMS, vol. 34(2), pages 320-323, April.
    3. Nick Laskin, 2014. "New Pricing Framework: Options and Bonds," Papers 1407.4452, arXiv.org, revised Oct 2014.
    4. Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144.
    5. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
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