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Telegraph Processes and Option PricingFinancial Modelling and Option Pricing

Telegraph Processes and Option Pricing: Financial Modelling and Option Pricing [In Chapter 5 we apply the results of previous chapters for option pricing. The fundamental building block of all financial modelling is the concept of arbitrage-free and complete market. For the time- and space-continuous stochastic models the unique underlying process satisfying this concept is the geometric Brownian motion. In contrast, we suggest another approach to the continuous-time stochastic modelling of financial markets based on the telegraph processes. We construct a simple model, which is free of arbitrage and complete.] http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png

Telegraph Processes and Option PricingFinancial Modelling and Option Pricing

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Publisher
Springer Berlin Heidelberg
Copyright
© The Author(s) 2013
ISBN
978-3-642-40525-9
Pages
89 –125
DOI
10.1007/978-3-642-40526-6_5
Publisher site
See Chapter on Publisher Site

Abstract

[In Chapter 5 we apply the results of previous chapters for option pricing. The fundamental building block of all financial modelling is the concept of arbitrage-free and complete market. For the time- and space-continuous stochastic models the unique underlying process satisfying this concept is the geometric Brownian motion. In contrast, we suggest another approach to the continuous-time stochastic modelling of financial markets based on the telegraph processes. We construct a simple model, which is free of arbitrage and complete.]

Published: Oct 18, 2013

Keywords: Option pricing; Hedging strategies; Martingales; Jump-telegraph processes; Rescaling; Implied volatility

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