Trading Volume in Models of Financial Derivatives
This 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.
When requesting a correction, please mention this item's handle: RePEc:sbs:wpsefe:2001mf03. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Maxine Collett)
If references are entirely missing, you can add them using this form.