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A jump telegraph model for option pricing

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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.

Suggested Citation

  • Nikita Ratanov, 2007. "A jump telegraph model for option pricing," Quantitative Finance, Taylor & Francis Journals, vol. 7(5), pages 575-583.
  • Handle: RePEc:taf:quantf:v:7:y:2007:i:5:p:575-583
    DOI: 10.1080/14697680600991226
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    References listed on IDEAS

    as
    1. Elisa Nicolato & Emmanouil Venardos, 2003. "Option Pricing in Stochastic Volatility Models of the Ornstein-Uhlenbeck type," Mathematical Finance, Wiley Blackwell, vol. 13(4), pages 445-466.
    2. 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.
    3. Nikita Ratanov, 2004. "Option Pricing Model Based on Telegraph Processes with Jumps," BORRADORES DE INVESTIGACIÓN 004330, UNIVERSIDAD DEL ROSARIO.
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    Citations

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    Cited by:

    1. Alessandro De Gregorio & Stefano M. Iacus, 2007. "Change point estimation for the telegraph process observed at discrete times," Papers 0705.0503, arXiv.org.
    2. Bogachev, Leonid & Ratanov, Nikita, 2011. "Occupation time distributions for the telegraph process," Stochastic Processes and their Applications, Elsevier, vol. 121(8), pages 1816-1844, August.
    3. Ratanov, Nikita, 2014. "On piecewise linear processes," Statistics & Probability Letters, Elsevier, vol. 90(C), pages 60-67.
    4. López, Oscar & Ratanov, Nikita, 2012. "Kac’s rescaling for jump-telegraph processes," Statistics & Probability Letters, Elsevier, vol. 82(10), pages 1768-1776.
    5. Igor G. Pospelov & Stanislav A. Radionov, 2015. "Optimal Dividend Policy When Cash Surplus Follows The Telegraph Process," HSE Working papers WP BRP 48/FE/2015, National Research University Higher School of Economics.
    6. Ratanov, Nikita, 2015. "Hypo-exponential distributions and compound Poisson processes with alternating parameters," Statistics & Probability Letters, Elsevier, vol. 107(C), pages 71-78.
    7. De Gregorio, Alessandro & Macci, Claudio, 2012. "Large deviation principles for telegraph processes," Statistics & Probability Letters, Elsevier, vol. 82(11), pages 1874-1882.
    8. 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.
    9. Nikita Ratanov, 2005. "Quantil Hedging for telegraph markets and its applications to a pricing of equity-linked life insurance contracts," BORRADORES DE INVESTIGACIÓN 003410, UNIVERSIDAD DEL ROSARIO.

    More about this item

    Keywords

    Financial market; Telegraph process; Hedging;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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