A jump telegraph model for option pricing Academic Article

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.

publication date

  • 2007/10/1

keywords

  • Arbitrage
  • Continuous time
  • European options
  • Financial markets
  • Jump
  • Market model
  • Option prices
  • Option pricing

International Standard Serial Number (ISSN)

  • 1469-7688

number of pages

  • 9

start page

  • 575

end page

  • 583